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brief "

The Transfor-
mation of the
Defense Industry
in Hungary

july ''
brief 14

Inhalt
Zusammenfassung
German Summary 4

Summary 5

The author
Historical Background 6

The Peak Years 7 Yudit Kiss is a Hungarian


economist. She has worked at and
Political and Economic Changes 9 consulted for a number of interna-
tional academic institutions and
Crisis and consolidation 8 UN organizations. She has published
The official policy on defense industry 10 widely on defense industrial
issues, with a focus on East Central
Europe.
Major Changes in the Defense Industry 11
Ownership changes 11
Profile changes 14
Reorganization—restructuring 20
Reorganization at the sectoral level 21
Major changes at the defense-related companies 22

The Fate of Military-related Assets 23

Workforce 23
Know-how 23
Production machinery 23
Networks 24
The military heritage 25
Cold capacities 25
Regional level conversion 26

A New Turning Point 27

Conclusions 29

Appendix 32

Interviews 30

References 31
Cover photo:
NATO Media Library, Raising of the
Hungarian Flag

2 B·I·C·C
brief 14
The Transfor-
mation of the
Defense Industry
in Hungary
by
Yudit Kiss

july 99 B·I·C·C 3
brief 14

Zusammen-
fassung Hoffnungen brachte die Konversion
nicht die Rettung vom zurückgehenden
Militärgeschäft, blieb aber auch nicht
German Summary ohne Erfolge. Dies zeigen Kurz-
analysen von drei Firmen (Bakony
Movek, Danuvia Gepipari, BHG). Der

D ie Rüstungsindustrie in Ungarn
wurde seit dem Ende der 80er
Jahre radikal verändert. Nachdem
Ab 1992 begann die Regierung ihre
Politik zu ändern. Pläne für den
staatlich gesteuerten Aufbau einer
große Rest betrieb
Diversifizierungsstrategien. Anstren-
gungen wurden unternommen, die
noch 1987/88 ein Höchststand der starken Rüstungsindustrie erwiesen sich zivile Produktion auszubauen, ohne
Produktion mit 30.000 Beschäftigten jedoch bald als unrealistisch. Die daß die militärische Produktion
erreicht worden war, sank die Industrie politische Steuerung wurde dem aufgegeben wurde. Beispiele, die kurz
in den 90er Jahren in eine tiefe Krise. Ministerium für Industrie und Handel beschrieben werden, sind FMV und
übertragen, das eine pragmatische Nitrokemia-Nike-Fiocchi. Nur wenige
In den ersten Jahren nach dem Haltung gegenüber Konversion und Firmen, wie PVG, DIGEP-AG und
politischen Umbruch von 1990, der Stützung der Rüstungsindustrie Mechlabor, setzten überwiegend auf
eine rechts-bürgerliche Regierung an einnahm. Die Regierung war bereit, Rüstungsproduktion.
die Macht brachte, mußte die immer Firmen zu unterstützen, zum Beispiel
noch weitgehend staatliche Rüstungs- durch Entschuldung, ohne eine Die betroffenen Firmen unternahmen
industrie fast ohne staatliche Unter- umfassende Steuerung anzustreben. eine Vielzahl von Reorganisationen,
stützung in einer völlig veränderten Die Reste der ungarischen Rüstungsin- Aufteilungen und Veränderungen der
Umwelt um ihr Überleben kämpfen. dustrie begannen sich zu konsolidieren. Rechtsform. Nur einigen gelang eine
Die Regierung stellte sich auf den Grundlage hierfür waren vor allem vollständige Reform der Organisations-
Standpunkt, daß die Rüstungsfirmen Exportaufträge. Auch wurde die struktur. Zahlreiche Arbeitsplätze
sich anpassen und den zivilen Märkten Privatisierung, die in den frühen 90er gingen verloren, wobei Beschäftigte
stellen müßten. Für die dafür notwen- Jahren kaum vorangekommen war, nun außerhalb des wirtschaftlichen Zen-
dige Konversion von Produktionsanla- auf der Grundlage klarer Regeln trums Budapest stärker betroffen
gen waren keine nennenswerten Hilfen beschleunigt. waren. Produktionsanlagen und
vorgesehen. Netzwerke wurden nur in einigen
Die Hauptlast und -verantwortung für Fällen übernommen. Der Verkauf von
1993 war die Produktion auf 10 die Anpassung an geschrumpfte Flächen war oft eine wichtige Quelle
Prozent des Niveaus von 1988 militärische Märkte und den Auf- oder zur Finanzierung der Umstellung.
gesunken, die Beschäftigung betrug Ausbau ziviler Produktion blieb jedoch
noch etwa 20 Prozent der Zahl von bei den verschiedenen Firmen. Im Ergebnis hatte Ungarn 1998 eine
1988. Viele Firmen hatten sich mit stark geschrumpfte Rüstungsindustrie,
mehr oder weniger mäßigem Erfolg an Veränderungen zeigen sich vor allem in mit noch ca. 5.000 Beschäftigten. Die
der Konversion ihrer Produkte und drei Dimensionen: Eigentum, Industrie hatte sich außerdem gegen-
Produktionsanlagen versucht. Relativ Produktionsprofil und Organisations- über der Zeit des Staatssozialismus
erfolgreich waren vor allem solche struktur. deutlich verändert. Um den Preis
Firmen, die, zum Teil auf der Grund- signifikanter Verluste an Arbeitskräften
lage von Konkursen, radikale Um- Bis 1998 war die ehemalige ungarische und Kapital sind die verbliebenen
strukturierungen vornehmen konnten. Rüstungsindustrie bis auf wenige Rüstungsfirmen effizienter, flexibler
Musterbeispiel hierfür ist Videoton. Betriebe privatisiert. Eine wichtige und stärker in die ungarische und
Videoton profitierte vom vorhandenen Rolle spielte dabei ausländisches Weltwirtschaft integriert. 1997/98
Know-how im Bereich von Elektronik Kapital. Allerdings erwies sich Privati- begannen sich die Zeichen zu mehren,
und Telekommunikation, einer sierung nicht als Allheilmittel. Das daß nationale Beschaffung und
traditionellen Stärke der ungarischen Beispiel dreier Firmen (MFS, Gamma internationale Kooperation deutlich
Rüstungsindustrie. In vielen anderen Muvek, Siemens-Telefongyar) zeigt die zunehmen werden. Die allgemeine
Fällen aber blieb die, in der Regel nur Bandbreite der Effekte der Privatisie- wirtschaftliche Erholung und die
teilweise, Umstellung der Rüstungs- rung. Aussicht auf die Mitgliedschaft in der
produktion auf Fertigung für zivile NATO verstärkten den Trend der
Märkte Stückwerk. Alle Firmen waren gezwungen, ihr Wiederbelebung der ungarischen
Produktionsprofil zu ändern. Etwa ein Rüstungsindustrie.
Drittel der noch Ende der 80er Jahren
wichtigsten Firmen konvertierten ihre
Produktionsanlagen vollständig auf
zivile Produkte. Entgegen anfänglicher

4 B·I·C·C
summary

Summary
T he Hungarian defense industry has
undergone a radical transforma-
tion since the end of the 1980s.
reorganizations, decentralizations and
legal transformations. Some
accomplished genuine restructuring by
transforming the entire functioning of
After reaching a production peak in the enterprise.
1987/88 it then sank into a major
crisis. As of 1993 the sector was only As a result of all these changes, by
producing approximately 10 percent of mid-1998 the Hungarian defense
its record output and employed 20 industry was significantly reduced. It
percent of its previous workforce. had a different structure and internal
hierarchy than that which had prevailed
From 1994 the first signs of under state socialism. At the price of
consolidation appeared. Defense significant human and material losses,
industry production resumed, some the surviving defense-related
important export deals were companies became more efficient,
concluded, and some crucial questions more flexible and more integrated in
regarding privatization and official both the Hungarian and world
support for the sector were decided. economies. As of 1997/98 there were
The consolidation of the Hungarian signs that local orders and foreign
defense industry was principally cooperation would significantly
industry-led. State authorities exerted a increase. The general economic
conspicuously minor influence on the recovery and imminent NATO
sector compared to that of the past. membership have also increased the
prospects for a strengthened
The most important sectoral Hungarian defense industry in the
transformations took place in three foreseeable future.
dimensions: ownership changes, profile
changes and organizational changes.

By mid-1998 the bulk of Hungarian


defense industry enterprises were
privatized. As the Hungarian armed
forces were left with very restricted
possibilities for ordering new
equipment from the defense industry,
the sector was principally dependent
on foreign orders and financing. As a
result, foreign capital became an
important new actor and played a
significant role in shaping the sector.

About one-third of the principal


weapon producers of the late 1980s
converted their production to civilian
use. The remainder diversified their
activities, preserving an important
defense-related division while
extending the scope of civilian
production. Some companies opted to
become predominantly military-
oriented. As far as organizational
changes were concerned, defense
industry enterprises went through

B·I·C·C 5
brief 14

Historical
Background Between 1970 and 1988 the structure
of the defense sector gradually
changed. The share of weapons
production dropped from 15 to 8
percent, ammunition from 22 to 1
percent, and vehicles from 34 to 7
T he origins of the Hungarian
defense industry date back to the
Austro-Hungarian Empire, when some
The Hungarian defense industry
emerged from the Second World War
in ruins. With the subsequent
percent. Conversely, the share of
telecommunication equipment
increased from 25 to 80 percent
of the major arms factories were Communist takeover in 1948, and the (Tothszollosy, 1993, p. 5). Seventy
established in the framework of a introduction of a new, forced percent of the Hungarian armed
large-scale, state-backed industrializa- industrialization program in which forces’ needs by this time were being
tion program. The most important heavy industrial branches (including met through imports. In the mid-1980s
defense-related branches were the metallurgy, machinery, chemical and a major modernization program was
electrotechnical industry, with construction) were prioritized, the undertaken to extend and modernize
companies like Tungsram, Telefongyar, defense industry became an engine of existing production capacities.
Ganz Gepgyar and Lang Gepgyar; the industrial growth. In 1953, 70 percent
vehicle and agricultural machinery of the Hungarian armed forces’ needs
industry—the most important were met by the indigenous military
company being Weiss Manfred Works, industry (Gombos, 1992, p. 1). This
later known as Csepel Steelworks—, period culminated in the establishment
and the aircraft industry. These of the Warsaw Treaty Organization
companies were all based in Budapest. (WTO) in 1955. The country’s
increasing economic and political
The end of the First World War difficulties led to the 1956 popular
significantly restricted the demand for uprising, which was followed by a slow
these products. The Versailles Peace and painful stabilization period. During
Treaty had imposed severe restrictions this time defense industry development
on the military capabilities of the ground to a halt.
defeated powers, including Hungary.
The absence of both internal and Reorganization began anew in 1958
external demand led to a near halt in according to guidelines established by
the sector’s activities. From the end of the Warsaw Pact. Dual-purpose
the 1920s, the defense industry was factories produced goods for both
rebuilt in cooperation with the military and civilian use, working
country’s new allies, first Italy and later primarily on the basis of Soviet
Germany. Ammunition, hand weapon licenses. Exchanges between WTO
and armed vehicle production, member countries were organized in a
precision and optical engineering quasi-barter system. Arms imports
industries were added to the existing were paid for with arms exports and
branches. In the so-called ‘Program of the balance was filled with both
Gyor’ launched in 1938, Hungary military and civilian goods. According
announced its decision to rearm itself to Gombos, by 1970 the Hungarian
in preparation for the next war. At the defense industry had reached a size and
height of the defense industry structure which corresponded to the
reconstruction 70,000 people were needs of the WTO, as required under
directly employed in the sector. The the alliance agreement (Gombos, 1992,
most important companies in this p. 1). Hungary specialized in
period were the Fegyvergyar, Danuvia telecommunications, vehicle and
and Diosgyori Gepgyar (Tothszollosy, chemical production, and field
1993, p. 5). equipment for the Hungarian armed
forces was also locally produced. While
the country was a member of the
Warsaw Pact, defense industry
production had a higher rate of growth
than the national industrial average.

6 B·I·C·C
peak years

The Peak Years

I n the late 1980s, the Hungarian


military industrial output consisted
of 66.7 percent telecommunication
also considered as such since, although
they were not producing for the
military at the time, they had
electronics and precision instruments, maintained military-related production
13.8 percent vehicles, 10.8 percent assets (Gombos, 1994, p. 4).
weapons, and 1.8 percent ammunition.
The remaining 6.9 percent was listed as Most defense industry companies were
‘other products’ (Csobay, 1990a). Most based in the capital, Budapest. Some
of this production was geared towards facilities were developed in already
export markets. In the peak year of established industrial centers, for
1988, 76 percent of production was example around Miskolc,
exported, of which 60 percent went to Szekesfehervar or Veszprem. Other
the Soviet Union. (Heti Világgazdaság, companies were green-field
5 November 1994). According to data investments set up in remote areas for
published in 19941, in the 1988 peak security reasons. There was a strategic
year 40 enterprises produced 21 billion consideration in the post-World War II
Hungarian forint (Ft) in military regional organization of the Hungarian
output, amounting to 2.5 percent of defense industry, which resulted in the
the total manufacturing sector output replication of major production
(Heti Világgazdaság, 5 November facilities on the western and eastern
1994). The share of defense-related sides of the country. This constituted
activity for machine industry preventative planning, as it was
production reached 6 percent, and believed that in the event of an attack
between 25 and 30 percent of from the West, companies in the
electronics and instrument production Trans-Danubian region would be
was for defense purposes (Kovacs, destroyed. As a result, the principal
1994). Approximately 30,000 people heavy metallurgy and chemical centers
were directly employed in the defense were developed in the northeast of the
industry, comprising nearly 2 percent country, near the border with the
of the economically active population Soviet Union.
(Figyelö, 14 February 1991).

All defense-related companies had


mixed profiles, with the exception of
the Godolloi Gepyar, an armored
vehicle and weapon repair factory
whose entire output was military-
related. 93 percent of Hungary’s
military output was produced by 17
enterprises, and the share of
production devoted to the military
sector ranged from 7.1 percent up to
82.2 percent of their total production
portfolios. There were only five
companies in which defense-related
production represented more than half
of the overall output. In addition to
the companies directly involved in
defense-related production, there were
a further 13 companies which were

1
Data published about the Hungarian defense
industry is still scarce and contradictory. Even
data concerning the past changes regularly.

B·I·C·C 7
brief 14

Political
and Economic Crisis and
consolidation

Changes The major structural crisis of the


Hungarian defense sector began to
manifest itself immediately following
the peak year of 1988. From 1989,
defense expenditures plummeted. With
T he momentous events of 1989/90
brought major political and
economic changes to Hungary.
social and regional differentiation
began to unfold. To stabilize the
economy and redress macro-economic
the dissolution of the Warsaw Pact and
the abandonment of the Council for
Mutual Economic Assistance
Following decades of a closed one imbalances, the Socialist-Liberal
(CMEA)—the trade and economic
party system rule based on a coalition introduced an austere
organization of the former Eastern
centralized yet comparatively economic stabilization package in the
bloc—Hungary lost its traditional
liberalized command economy, a new spring of 1995. While the project had a
export ‘markets’. Arms producing
multiparty Parliamentary system and negative impact on social welfare, it
industries found themselves hard hit by
market economy were introduced. succeeded in improving the general
the sudden socio-economic
Successive post-Communist elections state of the economy. In 1996
transformation as demand fell and
held in 1990, 1994 and 1998 resulted in economic growth resumed, with an
production ground to a near standstill.
shifting coalition governments, with important increase in industrial
In addition they lost the substantial
different parties holding a majority production and investments. By the
subsidies and protection previously
position. The first post-Communist end of 1997 foreign debt had been
offered by the state.
government which came to power after halved, the public sector deficit had
the elections in 1990 was led by the decreased and inflation was diminished
The crisis reached its lowest point in
center-right Hungarian Democratic (Financial Times, 9 December 1997).
1993. Most defense-related companies
Forum (MDF). After the 1994
were insolvent and many balanced at
elections a new coalition was formed Due to this macro-economic
the edge of bankruptcy. According to a
through an alliance between the stabilization program and the
Ministry survey quoted by Mr. Andras
Hungarian Socialist Party (MSZP), a demilitarization efforts launched after
Nagy, head of a Parliamentary
reformed successor of the pre-1989 1990, military expenditures were
subcommittee in charge of the defense
ruling Party, and the Alliance of Free radically scaled down along with
industry, 87 percent of defense-related
Democrats (SZDSZ), a party created considerable reductions in the size of
companies had only average level or
by the former opposition to the the national armed forces, with
else obsolete production technologies
Communists. In 1988, this coalition personnel dropping from 155,000 to
in 1993. In the event of a sudden
was ousted by a new right-wing 60,000 between 1989 and 1997.
coalition consisting of the Alliance of
Young Democrats-Hungarian Civic
Party (FIDESZ-MPP), the Table 1: Hungarian military expenditure,
Smallholders Party (FKGP) and other, 1990–1997
minor right-wing parties.
: In billion forint, current prices
a

Thanks to its earlier efforts at


economic and political reform, 1990 1991 1992 1993 1994 1995 1996 1997
Hungary was already in a relatively
advanced social and economic position Military expenditure a 52.4 54 60.8 64.5 66.5 76.9 87.9 96.8
by the time the major socio-economic
transformation began. Nevertheless, it Real value (1989=1) 0.85 0.65 0.6 0.55 0.44 0.39 0.36 0.33
proved unable to weather the transition
crisis which followed the end of the Share of development 19% 12% 11% 7.5% 9% 5.4% 7.2% 7.5%
Cold War. Industrial and agricultural military expenditure
output dwindled due to lack of
demand. Faced with declining terms of Share of military 2.5% 2.3% 2.3% 1.9% 1.6% 1.4% 1.2% 1.2%
trade, a mounting budget deficit, expenditure in GDP
increasing external and internal debts,
high and stagnant unemployment and
inflation levels, and with investments at
a near standstill, a dramatic process of

8 B·I·C·C
political changes

increase in demand, 56 percent of equipment, and a vehicle park of the


enterprises would have had insufficient Hungarian armed forces
numbers of qualified workers to fill (Nepszabadsag, 18 October 1995).
orders. 81 percent of the companies These developments provided new
had not fabricated defense-related hope for Hungary’s surviving defense-
products at all since 1990 (Magyar related companies.
Hirlap, 12 May 1993). By the end of
1993, the sector was only utilizing 20 Due to a newly introduced law on
percent of its remaining production secrecy, no official data was published
capacities (Medgyesy, interview, 1994). concerning defense industry output
after 1995. According to Dr. Geza
Beginning in 1994, however, the first Peter Kovacs, head of the Magyar
signs of consolidation appeared. Hadiipari Egyesulet (MHE, Hungarian
Certain companies had managed to Defense Industry Association), defense
stabilize their position. New export industry production in 1997 reached
deals were concluded with Ukraine and approximately 6–8 percent of the
India, among others. In November record level set in 1988/89 (Napi
1995 it was announced that Dunai Gazdasag, 30 October 1997). In a 1998
Repulogepgyar Rt. would cooperate in interview, Dr. Kovacs quoted figures
the production of the Swedish JAS 39 for defense industry output in the first
Gripen aircraft. This was the first case 6 months of 1997 of approximately
of the sought-after ‘new’ form of Ft5–10 billion, produced by 5,000
military cooperation involving Western employees of 40 companies (Napi
defense contractors. In 1995 it was Gazdasag, 25 March 1998).
officially announced that local
producers would have an opportunity
to participate in contracts to
modernize the communication system,
the chemical and nuclear instrument

Table 2: Hungarian defense industry production, 1988–1995


Sources: For columns 1–4: Isaszegi interview, Vilaggazdasag, 28 September 1994; for columns 1–4,
data marked with an *: Hegyhati interview, Nepszabadsag, 27 November 1993; for column 3: Heti
Vilaggazdasag, 5 November 1994; for column 6: Takacs interview, Nepszabadsag, 18. October 1995;
for column 7: Nagy interview, Vilaggazdasag, 4 August 1995.

1988 1990 1992 1993 1994 1995

Output 21 9.3 4.7* 6.7 6.3 6.7


(in billion forint)

Workforce 30,000 - - 5,600 - 5,600

Companies 40 - 80* 66* 60 60

Share of military 3%* - - Less than 1%* - -


production in GDP

Export 75% 50% 80–90%* Ft1.4 bn - 20%

B·I·C·C 9
brief 14

The official policy on In the spring of 1997, at the request of Technical Development Committee
the Ministry of Industry and Trade, a (OMFB), the state agency in charge of
defense industry total of Ft461 billion in bad debts coordinating and promoting R&D.
accrued by eighteen defense-related Enterprises could apply for preferential
The first major institutional changes companies as a result of pre-1989 loans to develop competitive new
concerning the defense industry
investments were written off. The most products (Balotay, 1993; Medgyesy,
followed the political changes that took
important of these companies were interview, 1994). Despite the grave
place from the early 1990s. The special Videoton Ipari Rt., Tavlozlesi crisis in the Hungarian defense
institutions and tools that had
Innovacios Rt. (TKI) and Mechlabor. industry, the development of defense
legitimized the defense industry’s
There was a precedent for such action: technology—financed jointly by
privileged status in the past were before 1992, fourteen enterprises had OMFB, the Ministry of Defense and
abolished. Representatives of the new
been allowed to write off a total of the Ministry of Industry and Trade—
government which took office
Ft381 billion in bad debts, and the continued throughout the 1990s.
following the elections of 1990 following year the Minister of Defense
declared that the defense industry
requested that Parliament permit State policy concerning the defense
would be expected to cope with the
forgiveness of an additional Ft230 industry was one, but not the only,
new economic environment as any million worth of bad debts belonging decisive factor that reshaped the
other branch of production. Soon,
to HM Radar Rt. (Napi Gazdasag, 4 Hungarian defense sector. Market
however, policy guidelines changed,
February 1997). forces and the enterprises’ own
and in January 1992 a Military efforts played equally important
Industrial Office (MIO) was set up to
A consolidation project was launched roles.
coordinate and promote military by the state in 1993. This involved the
production. selection of certain state-owned The changes took place in three main
enterprises which, due to their macro- dimensions:
The MIO’s large-scale projects economic and strategic importance,
envisaged the creation of a state-
qualified for intensive state aid in the ownership changes,
owned military industrial holding and a
form of debt-cancellations, additional
revamping of the Hungarian defense loans, and other protective measures. production profile changes and
industry to reproduce, and even
Of the thirteen major enterprises
surpass, its pre-crisis levels. Following
chosen, five were military-related: Ganz organizational changes.
long debates and political confronta- Gepgyar, Raba Rt., MGM, Nitrokemia
tions, the MIO was dissolved in 1994
and Budapesti Hiradastechnikai Gyar These changes all comprised
and a department of the Ministry of
(BHG). combinations of state- and enterprise-
Industry and Trade was charged with level decision-making. The decision of
the task of coordinating the Hungarian
The authorities also created an whether and when to privatize a
defense industry.
institutional framework to assist the company rested ultimately with the
companies in establishing international state, although some companies tried
By the mid-1990s a different,
contacts.2 They helped enterprises to influence outcomes through
pragmatic attitude concerning the
obtain quality certificates, eventually lobbying. Conversely, whereas
sector emerged. Mr. Bela Takacs, head even providing them with modest production profile changes were by and
of the Ministry department in charge
financial backing. At the end of 1997 large decided at enterprise level, state
of the sector confirmed that state the economic office of the Ministry of agencies could suggest or indirectly
agencies were unable and unwilling to Defense signed a cooperation encourage certain directions. At the
artificially recreate the defense sector
agreement with the Hungarian beginning of the post-Cold War
of the pre-1989 scale. The Ministry Organization of Standards, according transformation, the declared
had attempted to improve coordination to which a company could receive ‘‘neutrality” of the state regarding the
and cooperation within the sector,
military quality certificates as soon as defense industry prompted several
among those companies that had they had qualified for a civilian one companies to radically alter their
succeeded in overcoming the crisis by
(Vilaggazdasag, 9 September 1997; production profiles. Later, the
and large of their own accord. In so far
Takacs, 1997a). prevailing indecisiveness of the state
as their possibilities permitted, agencies was often interpreted as a sign
representatives of the Ministries of
Another indirect way in which the of the possible future rejuvenation of
Industry and Trade, Defense, and
Government supported the defense the defense industry. This reinforced
Foreign Economic Relations provided sector was through the promotion of the decision of several companies to
direct and indirect assistance to defense
military-related R&D. In 1993 a special conserve their defense-related assets.
industry companies. They mediated
‘Defense Industry and Defense
access to credits, promoted loan Technology Development Committee’
forgiveness, organized export deals and 2 In 1996 Ministry-level cooperation agreements
was set up within the National
represented Hungarian firms in were signed with India and Sweden, for example.
international negotiations.
10 B·I·C·C
industrial changes

Major Changes
in the Defense institutes nonetheless managed to
introduce efficiency, creativity and
profitability as the major guidelines for

Industry their company activities. They also


succeeded in preserving dynamic and
flexible working teams and continued
with their own R&D. Furthermore,
both pursued active marketing policies,
Ownership changes remaining majority state-owned resulting in a wide network of
enterprises were under the control of cooperation partners both in Hungary
At the beginning of the transformation various state apparatuses. and abroad (Tothszollossy, interview,
period all defense-related companies 1994; Erdej, interview, 1993). By 1998
had been state owned and supervised The Ministry of Defense supervised both companies were reporting relative
by their respective Ministries (Ministry five military-related companies financial stability.
of Defense or Ministry of Industry principally specialized in repair and
and Trade). In the early 1990s policy services. In addition to the obligatory According to a new law on privatiza-
guidelines concerning the privatization services they provided for the armed tion passed in 1997, ten Hungarian
of defense-related companies were not forces, these enterprises became companies were to be retained as long-
clear. At first defense industry compa- increasingly involved in activities within term state-owned properties, among
nies were supposed to be privatized the civilian sphere. HM Currus Rt., a them three military-related companies
quickly, as with any other enterprise. tank and armored vehicle repair (Magyar Loszergyarto Kft., Fegyver es
Soon afterwards, however, it was company which was an offspring of Gazkeszulekgyar Rt. (FEG) and
officially decided that for national Godolloi Gepgyar, amassed the bulk Mechanikai Muvek. They would be
security reasons no military-related of its profits from civilian production, managed by the state asset privatization
firms would be privatized for the time mainly in the repair and transformation and managing company APVRt.3 FEG,
being. of trucks and tractors. Another one of Hungary’s major weapon
company which specialized in radio- exporters, was able to maintain its
Between 1990 and 1994, privatization technological equipment succeeded in strong position primarily due to its
was a highly contested issue in the pulling itself out of the red thanks to solid export markets. Magyar
power struggle among various Minist- its specialized shops which sell hunting Loszergyarto Kft., on the other hand,
ries, state-asset managing and privatiza- and fishing equipment. According to struggled with serious financial
tion agencies, and the companies Ministry of Defense planning, in the difficulties, but it was hoped that in
themselves. These different organiza- near future these companies are to be time its position would stabilize.
tions pushed alternatively for rapid at least partially privatized (Heti Mechanikai Muvek failed to carry out a
privatization on the one hand and state Vilaggazdasag, 20 April 1996; Magyar genuine transformation and was unable
ownership on the other. As a result, Hirlap, 21 April 1998). to find major orders either locally or on
some companies, for example DIGEP- the export market. The enterprise was
AG, were hastily sold, while the sale of Two research institutes, Tavlozlesi kept afloat through state financing.
other companies remained blocked for Innovacios Rt. (TKI) and
lengthy periods. PVG-Dunai Merestechnikai, Informatikai Kutato es Bakony Muvek, Gamma Muvek, FMV,
Repulogepgyar and MFS-Magyar Innovacio Rt. (MIKI) were placed Danuvia, Mechlabor and Videoton
Loszergyarto Kft., for example, had to under the control of the Ministry of were all privatized with the
wait years for their privatization deals Industry and Trade. This measure was participation of Hungarian capital.
to come through. taken principally to ensure the Bakony, Dunai Repulogepgyar Rt. and
continuity of R&D activities at these FMV were bought up by their own
After 1994, with the advent of a firms. TKI specialized in research and employees and managers. The problem
Socialist-Liberalist coalition (MSZP- production of electronics and with this type of ownership change
SZDSZ), privatization was accelerated. microwave equipment. MIKI was that it rarely provided the addition-
With the exception of a handful of developed and produced measuring al capital infusions that were necessary
companies, the bulk of Hungarian instruments and equipment for
enterprises—including those with informatics.
defense-related activities—were put on
the market or made available to their In the early 1990s, both TKI and MIKI 3 At the beginning of the transformation
managers and employees. By mid-1998 underwent major restructuring. They
process there were several agencies involved in
most had been privatized. The few were compelled to make drastic state asset management, privatization and
personnel cuts and to reduce the scope company transformation. By 1998 the principal
of their economic activities. Both actor was Allami Privatizacios es Vagyonkezelo
Rt. (APVRt., State Asset Privatization and
Managing company).

B·I·C·C 11
brief 14

for a company’s reconstruction. of access to new business contacts was Examples of privatization I:
Videoton was a unique case, because also an important factor in the Matravideki Femmuvek-Magyar
unlike Bakony, Gamma Muvek and successful cases. Loszergyarto Kft.
FMV Rt.—which struggled with a lack
of capital and orders—its new owners At the beginning of the transformation Matravideki Femmuvek (MFS) was
were successful in mobilizing a there were high hopes that foreign established in 1952 for the production
considerable amount of external capital would invigorate the Hungarian of ammunition for handweapons. At
economic and political capital. defense industry, and the Hungarian the end of the 1950s, to compensate
economy as a whole. However, if the for the fluctuation of military-related
Foreign capital became a major new new foreign owners proved unable to production, the company diversified its
actor in shaping the Hungarian defense push for genuine restructuring and production to include industrial chains,
industry. However, unlike other provide the above-mentioned elements aluminum tubes and other metal-based
Eastern European countries, foreign required for it, privatization with packing material for the civilian sector.
capital participated principally in foreign participation did not bring the
privatization, the creation of joint desired results either. The privatization By 1991 both its civilian and military
ventures and enterprise restructuring attempts of DIGEP-AG and MFS- markets collapsed and MFS went
projects, and not specifically in military Magyar Loszergyarto Kft. failed for bankrupt. Until late 1994 the company
development programs in Hungary. these reasons. In addition, FMV was had been one of the very few
DIGEP-AG was bought up by Russian forced to pull out of its joint ventures, remaining classical state-owned
businessmen; Matravideki Femmuvek while BHG was abandoned by its enterprises under the control of the
(MFS) by a Canadian-American potential joint venture partners. On the Ministry of Industry and Trade.
entrepreneur; Orion Elektronikai Kft.’s other hand, Orion managed to Institutional insecurity about MFS’s
majority shares were bought first by a overcome its crisis and was able to status and profile blocked both a
Russian and later by a Singapore-based make progress due to the investments possible privatization deal and the
business group; Telefongyar and and fresh market contacts made by its introduction of radical internal
Danuvia established joint ventures with new foreign owners. Foreign changes for several years. In addition,
German partners; Comasec-Respirator cooperation had also been extremely the company found itself in a curious
Rt. was founded with Hungarian and advantageous in the cases of Videoton, deadlock. It had no more orders for
French capital; Gamma Muvek’s Comasec-Respirator Rt. and Nike- ammunition, but at the same time it
portfolio included some US partici- Fiocchi. Telefongyar also survived to was not allowed to transform or
pation; a deal between a division of become a successful company as a liquidate its defense-related productive
Nitrokemia and Fiocchi led to the result of its strategic alliance with the capacities.
creation of an Italian-Hungarian joint German company, Siemens.
venture; and FMV established a joint At the end of 1994 MFS was divided
venture with Italtel and the French The following case studies represent into three successor companies: two
Alcatel. three different examples of Hungarian civilian and one military-related. The
defense enterprise privatization: majority shares of the latter, Magyar
The cases of privatization of the Loszergyarto Kft., were sold to a
Hungarian defense industry The case of MFS-Magyar North American private businessman,
enterprises reveal that wherever Loszergyarto Kft. demonstrates the who was a major distributor of the
management succeeded in difficulties of transforming from a company’s products. In May 1997 the
accomplishing genuine restructuring, state-owned to a commercial APVRt bought the company back on
and where the company’s owners enterprise, and the damage of an behalf of the Hungarian state. There
were able to mobilize capital, find unfounded privatization decision; were two reasons for this move.
markets, promote technology Instead of proposing new investments
transfers and facilitate the firm’s Gamma Muvek was taken over by a and markets for the enterprise, the
insertion into the national and group of Hungarian and US foreign owner intended to realize
international economies, the potential businessmen, but privatization alone quick, high profits, even against the
for success was far greater. was unable to ensure sufficient company’s long-term interests. In
capital infusions; addition, by 1997 it was decided that
Private ownership became crucial certain military-related enterprises,
because it could provide indispensable Telefongyar represents a case in among them Magyar Loszergyarto
capital infusions needed for restruc- which privatization with foreign Kft., would remain in long-term
turing projects which the state was no capital turned out to be a success. majority state property. The minority
longer able to finance. The facilitation share package would be offered for sale
again.

12 B·I·C·C
industrial changes

The company’s new management In 1992 a liquidation procedure was developments the company still had to
launched a thorough quality and profit- initiated against the enterprise. Gamma struggle with capital shortage and
centered reorganization. In 1997 Muvek was on the verge of being market volatility (Figyelö, 9 June 1994;
Magyar Loszergyarto received the ISO closed down, but disagreements Nepszabadsag, 14 April 1994; Koi,
9001 quality certificate. On the basis of emerged between the ministries interview, 1997).
this qualification, it also received a responsible regarding the enterprise’s
certificate from the Quality Control fixed military assets. As a result, no Examples of privatization III: Siemens-
Committee of the Hungarian armed decision was taken. In the meantime, Telefongyar
forces for military products. Magyar the company management
Loszergyarto’s principal problem was a implemented a radical streamlining and Telefongyar was one of the oldest
lack of capital investment. Large debts reorganization program based on the industrial companies in Hungary. It
had accumulated, and it was only recommendations of the Budapest- was founded in 1876 to produce
through a medium-term bank loan based Financial Research Institute. communication technology, principally
awarded on condition of state Thus, by the time it was formally based on Hungarian inventions. Its
guarantee that the company was able to decided to privatize Gamma Muvek, its long-standing production and R&D
remain afloat. chances for survival were already traditions and its importance as a
favorable. supplier to both military and civilian
The company management placed sectors, made Telefongyar one of
emphasis on an active marketing policy, The reorganizations included drastic Hungary’s most important companies.
trying to reestablish business contacts reductions in workforce, economic In the 1980s the enterprise was faced
that had been severed during the activities and assets. Half of the real with the warning signals of a forth-
period of the foreign ownership. In the estate of its Budapest headquarters was coming production and financial crisis.
absence of large-scale orders from the sold and all branch companies became
Hungarian armed forces, the company independent. Two main profiles, the To prevent collapse, the company
needed to find market niches abroad. production of nuclear and process management chose a ‘leap forward’
In 1995 the enterprise struck a large- regulation instruments, were selected strategy. In 1989 it created a joint
scale deal with the Slovak police forces, for further development, whereas all venture with Siemens for the
and in 1997 the management was remaining economic activities were production and R&D of telecommu-
expecting to conclude an important cancelled. Strict budgeting and nication equipment. A change in top-
agreement with the Turkish efficiency-enhancing methods were level management in 1990 resulted in a
government (Pasztor, interview, 1994; introduced. Gamma Muvek’s former major internal reorganization of
Paulenka, interview, 1997). service network was transformed into production, and the company
small-scale commercial and service- eventually achieved financial stability.
Examples of privatization II: oriented joint ventures in the Czech In 1990, when the Hungarian national
Gamma Muvek Republic, Poland, Slovakia, Russia and telephone company MATAV
Brazil. In 1994, the company was announced its first open tender for the
The original Gamma Muvek was finally sold to a consortium of development of its network, Siemens
established in Budapest in 1920. It Hungarian and US businessmen. and Telefongyar made a joint bid and
produced precision and optical were awarded the second position.
instruments for both civilian and Even during the hectic period of Following this success, Siemens
military purposes. In the 1980s the reorganization, the company undertook major investments in the
company was producing military- management insisted on continued company and financed the costs of
related precision, electrotechnical, development. The enterprise developed retraining the workforce. In 1991 the
nuclear and geophysical instruments, NATO-compatible instruments for Siemens-Telefongyar joint venture
and instruments used for regulating military use, and environmental became majority Siemens-owned.
industrial processes. After 1990 monitoring instruments for civilian use.
Gamma Muvek’s military orders fell by Gamma Muvek, together with the Telefongyar was thus rescued from an
80 percent. The liberalization of Military Technology Research Institute impending crisis through its merger
imports, coupled with the switch to (HTI), developed a radiation detector with Siemens. With the backing of a
dollar-based commerce within the which was awarded a Silver Medal at powerful parent company, Telefongyar
former CMEA meant that the the 1997 Salon des Inventiones in did not face the problems encountered
company lost the bulk of its civilian Geneva. Despite these positive by most Hungarian enterprises: loss of
markets as well. markets, lack of capital, lack of
experience in marketing, and obsolete

B·I·C·C 13
brief 14

technology. In the course of a couple Conversion above, Telefongyar’s merger with


of years, Siemens-Telefongyar was able Siemens led to the abandonment of
to adjust to the challenges of the new In the early 1990s, conversion was military-related activity in the course of
economic environment to became being proposed to defense industry redefining the company profile. After
rather successful. These positive companies by their supervising having initially resisted the change,
changes were not accomplished authorities. This occurred, however, at a BHG and MOM were eventually
without costs, however. Significant rather theoretical level, since there was forced to renounce defense-related
workforce reductions and the no genuine official government policy activity due to the lack of new military
abandonment of some of the to promote conversion. Consequently, orders. Among the converted
company’s established industrial conversion became a purely enterprise- companies, only at Bakony and
traditions were the inevitable results of level choice. Company managements Telefongyar was the profile change
the process. which opted to convert to civilian accompanied by a thorough internal
production did so because they saw it restructuring. Both companies
At the time of winning the MATAV as a matter of necessity. The few succeeded in adjusting to the new
tender, Telefongyar had no prior companies that accomplished complete conditions and became rather
experience in producing telephone conversion were faced with new successful, although there was
centers. By the end of 1997 it had challenges arising from the economic uncertainty surrounding Bakony’s
become a Hungarian market leader and transformation. Coping with these situation due to the lack of capital and
an important actor in the telephone proved difficult even for those unpredictable ownership changes
network and mobile phone market as companies having considerable past rather than the change in profile or
well. The company was profitable and experience in the civilian sphere. problems of internal restructuring.
was able to carry out further invest- Problems of market competition,
ments in order to secure its future. inefficient marketing, and the lack of BHG, Danuvia and MOM all failed to
According to the strategic plans of the capital made adjustment hard for accomplish genuine enterprise
Siemens group, Siemens-Telefongyar enterprises such as BHG, Danuvia and restructuring. They tried to weather the
was expected to expand in Hungary Bakony Muvek. changes by relying on their production
and other Eastern European countries traditions and their accumulated assets
as well (Figyelö, 15 August 1996 and 7 Among the seventeen most important instead of adjusting in anticipation of
August 1997; Vilaggazdasag, 31 defense production companies in 1988, them. The failure to develop clear new
January 1991, 28 March 1997 and 8 five—Bakony, Danuvia, Telefongyar, goals and business strategies meant
May 1998; Napi Gazdasag, 28 March BHG and Magyar Optikai Muvek that the companies rapidly lost their
1997 and 18 April 1998). (MOM)—had ostensibly stopped development assets, including their
military-related activities by 1998. The relatively high-level industrial and
Profile changes halt was however incomplete. BHG and research traditions, skilled workforce
MOM had small-scale successor and technology. By mid-1998 Danuvia
By mid-1998 only a handful of companies through which they managed to stabilize its position, but at
companies had become exclusively preserved their military-related profiles. a relatively low level. At the same time,
civilian-oriented. Others opted for Danuvia was featured on the list of MOM and BHG were divided into
diversification, extending their civilian defense-related firms compiled by the small-scale companies of minor
production, but maintaining military Ministry of Industry and Trade, and importance.
production capacity. This meant that was a member of the Hungarian
although actual production was Defense Industry Association. Eszak- The following case studies present
suspended or reduced to a minimum Magyarorszagi Vegyimuvek (EMV), three different examples of conversion
level, military-related assets were despite its important military-related in the Hungarian defense industry.
preserved in hope of a future revival production, was not listed among the They demonstrate that a good decision
of the sector. Still other enterprises top producers of 1988. The company on profile change is not enough to
turned completely or predominantly has since entirely stopped its military- ensure a company’s survival unless it is
towards military-related activities. related production, and it therefore accompanied by thorough internal
now genuinely belongs to this group. restructuring.

Bakony, Danuvia, and EMV opted for a


radical profile change right at the
beginning of the transformation
period, when they recognized the
inevitable and impending decrease in
military-related orders. As described

14 B·I·C·C
profile changes

In the case of Bakony Muvek, both The company’s principal new profile products was so high that at the peak
the radical profile change and the centered around the production of of its production in the mid-1950s and
company’s internal restructuring can spare automobile parts. Bakony in the 1970s, the enterprise ran three
be considered successful. received subcontracted work from such shifts. Danuvia had an enormous
companies as BMW, Ford and Suzuki industrial estate, with a shooting
Danuvia deliberately opted for Hungary. Despite its precarious ground, a laboratory, and independent
conversion in the early 1990s, when financial situation, in 1997 the water, sewage, electricity, roads and
the company’s management forecast company undertook a minor invest- storage systems. In addition to this, it
and took measures to pre-empt the ment to improve the quality of its had an establishment in the country-
defense sector’s impending crisis. subcontracting work for Ford. In the side where, for security reasons, the
This decision, however, was not same year a joint venture was estab- whole production process could have
followed by a radical internal lished with the Russian company VAZ been relocated. The company’s
restructuring of the company. By to produce car parts. technological base made possible the
the end of the 1990s, therefore, in-house manufacture of all elements
Danuvia’s production had stagnated. Bakony was privatized in 1992. The needed for weapon production,
majority shares were transferred to a including a small foundry and full-scale
The lack of new orders and state-owned development bank while technology for producing mechanical
financial resources forced BHG to the remainder was divided between the parts.
renounce its military-related profile management and employees. In
in the early 1990s. Neither was the December 1997 the bank sold its Danuvia received its last order from
company able to assert itself on the shares to a Hungarian financial group. the Hungarian army in 1988. Following
civilian market, however, and the Following the deal, the management negotiations with the representatives
failure to undergo internal renewal sold its shares to the new owners and of the Ministry of Defense and
or to foster the development of the General Manager left the company. Ministry of Interior, the company
new business opportunities led to The new owners wanted to continue produced all the necessary spare parts
BHG’s disintegration. reducing product lines and workforce for those of its weapons expected to
levels. be in use until 2011. By 1990 its
Examples of conversion I: defense-related activities has ceased
Bakony Muvek In March 1997 Bakony received altogether. Part of the unused
another, specialized quality certificate, machinery, spare parts and materials
Bakony Muvek was established in 1938 the QS 9000, testifying to its ability to were sold, much of it as raw material.
for the production of ammunition. In provide the highest quality level Danuvia became a producer of
1990 the company management subcontracting work for automobile hydraulic supply sources, hydraulic
decided to liquidate its defense-related producers. In May 1997 a cooperation machines and spare parts.
profile. Machinery and technology agreement was signed with Mitshuba
were sold to Vietnam, workshops were of Japan. In 1998 Bakony’s new In August 1990 the company entered
emptied and, where possible, trans- owners initiated negotiations about a into a joint venture with one of its
formed to meet the needs of civilian possible joint venture with the German former principal commercial partners,
production. Alongside these produc- ITT company, indicating positive the German company Rexroth. The
tion profile changes, the company went future developments (Napi Gazdasag, most profitable activity—the
through a radical restructuring on the 22 June 1992, 22 and 24 July 1995; production of hydraulic supply
advice of an Austrian consultant, with Vilaggazdasag, 7 May 1988; Sin, sources—and many of the highly
financing derived from the enterprise’s interview, 1998). qualified workforce were transferred to
own resources. After a thorough this new company, in which Danuvia
analysis of the company’s assets and Examples of conversion II: Danuvia owned a 20 percent share. Danuvia
activities, several branch enterprises Gepipari Rt. itself continued to produce hydraulic
were sold, workforce reductions took elements and spare parts. By 1994 the
place and the production structure was Danuvia Gepipari Rt. was founded in company was fabricating approximately
simplified and streamlined. The 1920 for handweapon production. The 120 different types of product. Eighty
company’s internal hierarchy and company was principally defense- percent of its income was derived from
functions were reorganized. The related, with small-scale civilian work subcontracted to it as a result of
restructuring program envisaged a 30 activities. Demand for Danuvia’s the joint venture, and it was filling
percent productivity increase. Bakony minor orders for other companies and
was the first Hungarian company to generating additional income from
receive the ISO 9001 quality certificate renting out its premises. In 1994
in 1994.

B·I·C·C 15
brief 14

Danuvia was sold to three Hungarian Given the company’s economic providing spare parts and services for
businessmen in a leasing-privatization importance and in light of its their products still in use by the armed
scheme. Even though the company precarious situation, BHG was selected forces. The general managers of these
managed to survive, its crucial for the state’s consolidation program, companies confirmed that in the event
problems of future development, lack which effectively rescued it from of renewed demand (and possibly
of investments and capital, and its bankruptcy by granting crucial financial some financial incentives) they would
weak marketing strategy had not yet assistance and some minor orders be prepared to renew and expand their
been resolved (Sebestyen, interview, through state mediation. These military-related activity.
1994; Napi Gazdasag, 8 September interventions, however, were not able
1994). to guarantee the company’s long-term Companies which chose to continue
future. During the 1990s BHG’s military-related production were
Examples of conversion III: Budapesti country-based branch companies were nonetheless forced to diminish the
Hiradastechnikai Gyar (BHG) individually sold. In 1997 the scope of these activities. Videoton,
remaining, substantially reduced TKI and Gamma Muvek intended to
Budapesti Hiradastechnikai Gyar— Budapest-based enterprise was divided revamp and if possible expand
Budapest Telephone Company—was into three limited companies, one of military-related production, but they
one of the largest companies in which had some military-related placed more emphasis on the develop-
Hungary, specialized in telephone activity. ment of their civilian profiles. Strict
centers and military telecommunication efficiency criteria was introduced for
equipment. In the late 1980s the Following the loss of both its military both the civilian and military-related
company had renewed its production and telephone center markets, the profiles.
base in preparation for a major state management of the parent company
order, but subsequent changes in the opted to develop those civilian profiles In the above-mentioned cases,
political system radically altered the that in the past had served as auxiliary diversification took place within the
conditions. In the early 1990s the activities to its military production. By company. Another type of diversifi-
company formed a strategic alliance 1998 the company was producing cation was accomplished with the
with Northern Telecom to bid on a mechanical outfits and equipment (for actual separation of the different
tender for the production of telephone example telephone booths), as well as production profiles. In the cases of
centers on behalf of MATAV. Despite spare parts for computers. In 1997, in Nitrokemia-Nike-Fiocchi, Godolloi
their undisputed professional order to service its debts, BHG was Gepgyar-Currus, FEG, MFS-Magyar
competence, BHG-Northern Telecom obliged to give up its historical Buda- Loszergyarto Kft. and Pestvideki
lost the first tender, because the pest headquarters and move to a small, Gepgyar-Dunai Repulogepgyar Rt.,
competitors proved to be financially provisional office building next to it. In production divisions became indepen-
and politically stronger. The first addition to its symbolic weight, this dent companies. Though they were
winner was Muszertechnika, the first step demonstrated that in order to ease physically and legally separated from
private enterprise of Mr. Gabor Szeles, its financial difficulties, BHG had to the enterprise, they were often tied
Videoton’s general manager, in alliance begin to sell off its last capital assets together through production contacts,
with the Swedish telecom giant, (Nepszabadsag, 5 February 1997; Heti the use of common infrastructure and
Ericsson. The second winner was Vilaggazdasag, 11 May 1996; eventual cross-ownership. Usually in
Siemens-Telefongyar, discussed above. Vilaggazdasag, 12 January 1996; these cases the new company was
In a second MATAV tender called in Figyelö, 29 October 1992, 25 August created out of the former military
1995, BHG did not even stand a and 15 December 1994; Vari, interview, division—for example Nike-Fiocchi,
chance of winning, since by that time it 1997). FEG, Dunai Repulogepgyar Rt.—and
was evident that the company had became predominantly military-related.
failed to restructure, and had not Diversification The civilian successor companies, on
managed to find a powerful Western the other hand, normally became
business partner to support its bid. The Most defense-related enterprises in completely autonomous and were
loss of both tenders meant that BHG Hungary decided to extend their quickly sold.
was obliged to abandon its principal civilian production profiles and reduce
profile, the production of telephone or suspend their defense-related
centers. production. The companies that
suspended defense-related production
did not completely liquidate their
military-related productive assets. They
preserved the defense-related divisions
or chose to run them at low levels,

16 B·I·C·C
profile changes

The following case studies present warning signs of an approaching crisis remnants of the former Hungarian
three different types of enterprise in Warsaw Pact-based military electronics industry in a sub-contractor
diversification. production, the enterprise borrowed system for large-scale military projects
money to increase its military-related destined principally for export. The
Videoton diminished the scope of output as late as 1991. Neither did the workforce was recruited from the
its military production, but management react to the financial and successor companies of FMV (HM
reorganized it such that it became marketing problems which were Radar Rt., Mechlabor, BHG, Labor
much more efficient than in the already affecting civilian production by MIM, TAKI, Orion, Kismotor and
past. The company simultaneously the late 1980s. As a result, Videoton Gepgyar). According to a contract
extended its civilian profiles. As of declared bankruptcy in 1991. signed in 1993, VT-Rendszertechnika
the late 1990s, both divisions were also became a certified supplier for the
expected to increase their In December of that year, a Hungarian army.
production output and profit consortium of Hungarian private
margins. entrepreneurs, led by Mr. Szeles, In 1998 plans to establish further joint
bought the company and created a ventures in Carpathian-Ukraine,
FMV also preserved its military- financial holding. Videoton’s assets, Transylvania, Latin America and the
related profile while increasing the activities and development potential Middle East were announced. The
share of civilian production. were systematically analyzed and company envisaged further expansion
However, modification of the reorganized. Western management and both in the civilian and military
production structure was not accountancy systems and very tight electronics and telecommunication
accompanied by a thorough financial controls were introduced. industries (Megyeri, interview, 1994;
organizational restructuring. Neither Both workers and managers were Figyelö, 10 February 1994; 1 February
civilian nor military production was motivated to work more efficiently 1996; Napi Gazdasag, 13 February
able to generate enough revenues to following the introduction of a new 1997; Vilaggazdasag, 21 May 1998).
assure the company’s financial system of incentives.
stability and future development. Examples of diversification II:
The restructuring of Videoton proved Finommechanika Muvek (FMV)
At Nitrokemia-Nike-Fiocchi the to be a major success. The holding
different production divisions were became profitable by 1994 and it soon While Videoton managed to reestablish
separated into individual companies. expanded, creating branch companies itself as one of the leading companies
Thanks to an internal reorganization and joint ventures throughout in the Hungarian economy,
of the military-related profile Hungary. By mid-1998 it had four Finommechanikai Muvek (FMV), the
concentrated at Nike-Fiocchi, principal profiles. The first was other former giant of the Hungarian
prospects were fairly positive. The computer-technology, run in close co- telecommunication industry, struggled
parent company, where the rest of operation with IBM. The second was for survival. During the crisis of 1990–
the defense-related and civilian vehicle—principally spare parts— 1993 the company lost its markets,
production was continued, did not production, in cooperation with Alcoa accumulated bad debts and amassed
go through a major restructuring Fujikura Ltd., Michels Kabel, Texas enormous reserves of unsellable spare
process. By the end of the 1990s it Instruments, Volkswagen, Audi, parts. State privatization agencies tried
was facing serious adjustment Mercedes and Volvo. The third was to sell the enterprise, but due to its
problems. consumer electronics, with subcontrac- precarious financial situation and
ted work from Matshusita-Bosch, uncertain prospects there were no
Examples of diversification I: Video- Philips and Akai, as well as the serious buyers. The company’s assets
ton Ipari Rt. development and production of have since drastically eroded, and much
Videoton’s own products in of its highly qualified white- and blue-
The predecessor of Videoton Ipari Rt., cooperation with firms like Sanyo. collar workforce has left.
located in Szekesfehervar, was
established in 1938 for ammunition The forth production profile was In 1993 a FMV branch company
production. By the late 1980s Videoton defense-related. In 1993 one of specialized in radar technology was
was among the most important Videoton holding’s branch companies, separated from the parent company. In
Hungarian companies. Approximately VT-Rendszertechnika, reorganized the the framework of a debt-swap
one-third of its activity was defense- arrangement, the Hungarian Ministry
related, one-third computer technology of Defense and another state agency
and the remainder consisted of received the company’s shares.
consumer electronics. Despite several Together they founded HM Radar Rt.,

B·I·C·C 17
brief 14

a 100 percent defense-related Limited. During the 1990s the enterprise Becoming military
While this new company’s share of old struggled with an increasingly acute
FMV debts were eventually written off, lack of capital, became heavily A handful of company managements
FMV itself was still expected to honor indebted, and was unable to undertake opted to eliminate the civilian
its share. major new investments. It also production profiles inherited from the
continued to be a source of serious past and instead concentrate their
In 1995 the management of what environmental damage. In 1993 efforts on military-related production.
remained of FMV bought the Nitrokemia became a commercial This specialization proved fruitful if
enterprise with financial assistance company under the ownership of the the company’s products could find
provided by an Austrian private APVRt. It was among the 13 large- stable markets, principally external
businessman. Privatization saved the scale industrial companies selected for ones, since local demand remained low.
company from liquidation, but did not rescue by the state. Several important This was the case of FEG and to a
provide important new inputs for its state interventions intended to improve lesser extent MFS-Magyar
further development. The company’s the company’s financial situation could Loszergyarto Kft. and Dunai
uncertain economic situation and not prevent it from edging towards the Repulogepgyar Rt. Other companies,
restricted financial possibilities made it brink of bankruptcy. By the end of however, vested their future in
impossible to carry out new 1997 its output and workforce had exclusively military-related develop-
developments. FMV’s main profile was significantly diminished and its ment, but did not carry through
telecommunication equipment accounts registered losses. The number internal restructuring, preliminary
production, based principally on one of employees had fallen from 7,000 in feasibility studies and market research
military-related product developed 1988 to 2,000 a decade later. In June to improve their efficiency, financial
before 1990. In order to survive, the 1998 Nitrokemia was divided into two possibilities and access to markets.
company tried to find minor orders, state-owned limited companies. The Since the state authorities refused to
subcontracted work or cooperation production profile of one of these bail these companies out as they had
with other Hungarian and foreign companies included the successful done in the past, several ended up on
firms. To manage liquidity problems, pesticides and semi-processed goods the edge of bankruptcy.
parts of the company assets, principally previously produced by Nitrokemia. All
its enormous real estate, were sold, other activities, including ammunition The following case studies comprise
leased or rented out (Napi Gazdasag, and explosive production, was three examples of military
14 July 1992 and 27 June 1994; Nagy, delegated to the other company, which specialization:
interview, 1997). also inherited the former state-owned
company’s debts and environmental In the case of PVG-Dunai
Examples of diversification III: rehabilitation obligations. State Repulogepgyar Rt., military
Nitrokemia-Nike-Fiocchi authorities aimed for the rapid specialization proved to be a viable
privatization of both companies. path to survival, since it was
Nitrokemia Rt.—Nitrochemical Works, accompanied by the efficient
Balatonfuzfo—was established in 1921 In the early 1990s Nitrokemia’s former reorganization of the company and
for military chemical production. It production divisions were included in an effective preliminary market
became an outstanding producer of the creation of five independent research strategy. At the same time,
explosives for both civilian and military shareholder companies or joint the company management realized
use, with its own R&D and widespread ventures. One of these, Nike-Fiocchi, that a simultaneous development of
international business connections. was established with the Italian Fiocchi its civilian profiles would provide a
From the 1950s it produced fertilizers company for ammunition production more balanced situation in future.
and other semi-processed products. in 1991. Nitrokemia owned 50 percent
After the systemic changes, Nitrokemia of Nike-Fiocchi’s shares and the latter The management of DIGEP-AG
lost its massive agricultural markets and used the premises and services (Army Co-op) clung to military
also its military orders in both Hungary provided by the parent company. Nike- production despite the fact that the
and the former Soviet Union. In 1993 Fiocchi was a prospering enterprise company lacked financial resources
military-related production still with a predominantly military profile, and markets for its products. In
represented 8 percent of the compa- producing principally for export. In addition there was no renewal in the
ny’s total output, but even this was 1996 the company presented a newly company’s structure and manage-
suspended in 1994. developed grenade that was expected ment. As a result of both a wrong
to become a major export success choice in profile and bad business
(Baracskay, interview, 1994; Szabo, practices, the company had to
interview, 1994; Heti Vilaggazdasag, suspend its activities.
16 August 1997 and 8 May 1988;
Nepszava, 8 January 1996 and 26 June,
1988).

18 B·I·C·C
profile changes

Due to administrative complications financial situation, Dunai the situation was reversed, and it was
as well as financial and marketing Repulogepgyar bought a used machine the rest of the enterprise that kept
problems, Mechlabor spent years on which enabled it to produce spare parts DIGEP-AG alive. In November 1989 a
the verge of bankruptcy. In order to for the Swedish ‘Gripen’ aircraft in liquidation process was started against
survive, the company was forced to 1994. A cooperation agreement was DIGEP. In 1992 the company was
terminate all of its civilian activities. signed with Saab in November 1995. divided into independent enterprises
The military specialization proved Dunai Repulogepgyar’s contribution offered for individual sale. DIGEP-AG
feasible only thanks to its merger was relatively modest, but the was taken over by two Hungarian
with the powerful Videoton Hungarian partners considered it a first entrepreneurs and was renamed Army-
company. and important breakthrough as it Coop. The Military Industrial Office
created possibilities for new fought to recuperate at least 10 percent
Examples of military specialization I: investments and advanced technology of the company’s shares, but was
PVG - Dunai Repulogepgyar Rt. transfer, while serving as a reference unable to mobilize the necessary
for the company’s future market resources. The Ministry of Defense
The predecessor of PVG, Pestvideki research. declared that it did not need the
Gepgyar, was founded in 1941 for company’s products, and therefore did
military aircraft production. Before In July 1996, following a six year not oppose the privatization decision.
1990 PVG had specialized in repair and liquidation process, Dunai
servicing of military aircraft and Repulogepgyar bought its original Despite Army Coop’s precarious
helicopters. During the 1980s, foreign mother company, Pestvideki Gepgyar. financial state, uncertain future and
orders began to diminish, and despite In its new business plan the company evident marketing problems, the new
its decreasing resources, the manage- envisaged the loosening of its owners insisted on further military-
ment tried to keep the company afloat dependence on domestic orders and related development. With the help of
by postponing crucial changes and the extension of its civilian production some technological development
through heavy borrowing. (Napi Gazdasag, 4 June 1994; Magyar funding in addition to its own
Nemzet, 8 October 1994 and 17 resources, the company developed a
Despite these efforts, PVG went November 1995; Figyelö, 23 Novem- new type of NATO- compatible
bankrupt in June 1990 and was ber 1995; Heti Vilaggazdasag, 20 grenade launcher. Officials of the
scheduled for liquidation. Several August 1994 and 20 July, 1996; Kovacs, Ministry of Foreign Economic
attempts to sell the enterprise failed, Dr. G.P., interview, 1994). Relations and the MIO facilitated the
and in June 1992 the company firm’s entrance to the US market. The
employees created Dunai Examples of military specialization II: weapon was tested by the US army and
Repulogepgyar Ltd. This new DIGEP-AG–Army-Coop received positive evaluations, but this
enterprise leased the workforce and did not translate into orders.
productive assets from the parent Diosgyori Gepgyar Altalanos Gepgyar
company until the latter was liquidated (DIGEP-AG), Hungary’s only In the meantime, it became known that
or sold. From the time of its important heavy weaponry factory, was the two Hungarian businessmen were
formation, Dunai Repulogepgyar had established in 1949. In order to fully acting on behalf of a dubious Russian-
to struggle with the lack of domestic utilize its large productive capacities, American enterprise. The company’s
orders from the Hungarian armed compressors and machine parts for new management was unable to
forces, vulnerable foreign markets, lack civilian use were also fabricated. In reorganize production, find new
of capital, and administrative and legal January 1989 DIGEP-AG shifted markets or new work opportunities. In
complications. The enterprise entirely to military production. November 1994 Army-Coop
nonetheless managed to survive to However, in that same year the suspended its activities, and as of
become a fairly successful private company did not get any new orders. December 1997 the loan taken out to
company. pay for the enterprise had not yet been
DIGEP-AG was part of a large-scale serviced. In October 1997 the
Dunai Repulogepgyar’s production metallurgy trust, DIGEP, which had 9 authorities of Borsod-Abauj-Zemplen
profile was revamped, and measures to separate production plants. Until 1988 County initiated a process against the
increase efficiency were introduced. An DIGEP-AG was the most lucrative company’s Russian General Manager
intense campaign was launched to find enterprise of the trust, practically and owner because he had failed to pay
new market and cooperation assuring the financial survival of the social security contributions for his
opportunities, and business partners otherwise loss-making trust. After 1989 employees (Feher, interview, 1993;
both in Western and Eastern Europe. Napi Gazdasag, 2 December 1997).
In the hope of attracting Western
cooperation, and despite its precarious

B·I·C·C 19
brief 14

Examples of military specialization III: framework of Videoton’s These important changes however did
Mechlabor subcontractor system. It received a not necessarily entail a genuine
major capital infusion and was backed restructuring of the companies. In
The predecessor of Mechanikai by the financial weight of the parent several cases, organizational changes
Laboratorium—Hiradastechnikai company, and was soon able to remained at the surface, without
Kiserleti Vallalat—was founded in participate in large-scale export resulting in fundamental changes in the
1947 for the production of projects (Bodi, interviews, 1993 and production process, which often
telecommunication equipment for 1994). remained inefficient. Genuine
military use. From the 1950s the restructuring involved an in-depth
company had important civilian Profile changes at the sectoral transformation of the whole
profiles as well. Both civilian and level production process from military-
military production were geared centered to profit-directed activities.
towards individual customers’ needs. The profile changes of individual This included a reevaluation of
Mechlabor created the first camera for companies in the Hungarian defense production goals, modification of the
the Hungarian television company, the industry reshaped the structure of the company’s internal hierarchy,
first Hungarian recorders and cameras sector at the macro-level as well. By the reassessment of decision-making
for oil-drilling equipment, among other mid-1990s the share of telecommuni- patterns, and establishing relationships
products. It had a fairly developed cation equipment and precision with the outside economic
technological base, a highly skilled instruments had diminished, while the environment. Only a handful of
workforce, and its own R&D center. importance of weapons, vehicles and companies—such as Videoton, Orion,
ammunition increased (Nepszabadsag, Comasec-Respirator and TKI—
Due to the loss of lucrative military 18 October 1995). pursued such in-depth restructuring.
markets and increasing financial
problems, the company went bankrupt No official data for total output was Restructuring could take place with or
by the end of 1992. The liquidation published after 1995, but changes in without a change in production profile.
process which was initiated became the sector’s structure could be In principle, genuine conversion would
very complicated, as state authorities discerned from the public export imply both profile changes and
were unable to decide the company’s figures. Between 1991 and 1996 thorough restructuring of the compa-
future. As a result of these administra- Hungary exported annually US $20–25 ny. Such changes only took place at
tive complications Mechlabor’s million worth of military products. Bakony and Siemens-Telefongyar.
privatization was also blocked. In Twenty-five percent were handweapons
addition, it was unable to secure credits for self-defense, 15 percent consisted An example of genuine
due to its financial situation, even in of telecommunication instruments and restructuring: Orion
the rare event that it managed to get an 65 percent was ammunition and
order. By the end of 1993 the company explosives (Nepszava,15 May 1996). Orion Elektronikai Kft.—Orion
had to reduce its assets to the level of Electronics Limited, Budapest—was
fixed military capacities: 200 employees Reorganization— founded in 1913 for the production of
and the corresponding productive restructuring electrotechnical and telecommunica-
assets. To keep this small remaining tion equipment. In the 1930s it was
unit alive, Mechlabor tried to find one of the most famous Hungarian
The crisis of the defense industry
minor work subcontracted from the companies, having a worldwide
military, and introduced some forced companies to reorganize reputation. After World War II the
conversion products. They intended to themselves. All military-related company’s main profile was radio and
enterprises, irrespective of their chosen
produce food processing machinery, television production, and later
garden furniture and special machines, profile strategy, had to radically included microwave radio systems.
however in the absence of capital and diminish their output and workforce. Military-related profiles were
They all underwent a process of
orders, these efforts failed. introduced after 1956. In the early
commercialization, decentralization 1990s the company was hit by the
and major internal reorganization.
In 1994 Videoton holding bought up abrupt liberalization of imports, the
Larger formerly state-owned
49 percent of Mechlabor’s shares. The demise of the CMEA and the loss of
company lost its formal independence, enterprises were subsequently divided military orders both for export and
into several independent companies,
but managed to survive within the local use.
and previous divisions became new
companies.

20 B·I·C·C
reorganization

At the end of 1991 the company’s Union. The management was member companies, HSZ was presided
liquidation was initiated. During the particularly proud of the fact that over by Mr. Laszlo Kocsis, a
liquidation process Orion’s manage- Orion was one of the few Hungarian department head in the Ministry.
ment pushed through a radical profile electronic equipment producers that
cleaning and internal restructuring managed to save its research and Another representative organization,
program. Output, economic activities production traditions (Magyar Nemzet, the Hungarian Defense Industry
and workforce were dramatically cut, 9 June 1994; Uzleti Het, 2 December Association (MHE) was also formed in
but productivity and efficiency had 1996; Magyarorszag, 13 June 1997; 1993. At the time it was established,
considerably increased, and in 1995 the Venekei, interview, 1997). MHE had thirty-seven member
company was awarded the ISO 9001 companies having both civilian and
quality certificate. Reorganization at the military profiles. The founding
president was Dr. Geza Peter Kovacs,
Orion used its existing sales
sectoral level General Manager of the Dunai
infrastructure to introduce new civilian Repulogepgyar Rt. One of the
In the early 1990s, a rapid erosion and
products, predominantly television sets. Association’s targets was to increase
disintegration process took place
Principally geared towards the Russian local suppliers’ share of armed forces
market, Orion carried out a strict within the Hungarian defense sector. purchases, and to render it exclusive in
The strong coherence and solidarity
selection of business partners before some areas (Nepszava, 27 May 1995).
which characterized the sector in the
launching a new promotion campaign. The MHE regularly criticized the
In late 1993 the Russian past was suddenly only able to function unsystematic approach which
when backed by financial resources or
Yuganskneftegaz Company, the world’s characterized the procurement policy
sixth largest oil company and one of special assets. As a result, the of the armed forces, and the lack of
Orion’s long-time trading partners, companies found themselves alone in official support for domestic defense
their struggle to survive.
bought up the majority of Orion’s industry enterprises.
shares. The joint venture became 83
Starting in 1993–1994, the first signs
percent Russian property and was Defense-related companies had high
of reorganization and deliberate
renamed Yuganskorionneftegaz. The hopes that the law on public
new majority owners provided further concentration could be discerned in procurement which regulated the
the sector. Industry associations and
assistance with developments and procedure of public orders of
lobby groups were organized to
expansion of the company’s business budgetary institutions would be of
network. represent the interests of defense- benefit to them, however once the law
related companies at the political level.
was introduced, the MHE claimed that
In highly capital-intensive sectors such
In June 1997 the Singapore-based it was not favorable to the Hungarian
Thakral Company bought Orion’s as telecommunications and the defense industry. The Association
chemical industry, a processes of
majority shares. This new owner proposed modifications and lobbied
concentration initiated by the
wished to promote Orion’s R&D for the initiation of a new ‘defense
activity, stabilize its position and use enterprises themselves began to take economy law.’ In anticipation of new
shape. For example, Videoton
Orion’s extended Eastern European purchases required for the
reorganized what remained of the
networks for its own expansion. By modernization of the Hungarian
mid-1998 Orion’s main profile former military electronics industry, armed forces, the MHE requisitioned
and a network of cross-ownership and
consisted of consumer electronics and the government to prescribe an
the production of professional intense cooperation emerged between obligatory share of its orders to
electronic equipment. The share of the three major military-related Hungarian subcontractors
chemical producers: Eszak-
military-related activity was mostly (Nepszabadsag, 10 August 1996;
limited to the provision of spare parts Magyarorszagi Vegyimuvek (EMV), Magyar Nemzet, 12 August 1997;
and servicing. The company found Nitrokemia and Budapesti Nepszava, 21 January 1998).
Vegyimuvek.
itself in a good economic and financial
position and had stable markets.
In 1993 the Defense Industrial
Approximately 20–30 percent of its
Alliance—Hadiipari Szovetseg
production was exported, of which 95
percent went to the former Soviet (HSZ)—was set up under the umbrella
of the Ministry of International
Economic Relations. With twenty-two

B·I·C·C 21
brief 14

Major changes at the employees of former major military MATAV, MFS-Magyar Loszergyarto
enterprises, often with the use of Kft., VT-Mechlabor, Mechanikai
defense-related capital assets, know-how and networks Muvek Rt., Raba Rt., Videoton, TKI,
companies from the original company. There were Antenna-Hungaria Rt. and MIKI
no significant green-field investments (Nepszava, 28 January 1998). Of these,
According to officially published lists in the sector. The Appendix presents nine were successor firms of
there were seventeen major companies the ten-year trajectory of the seventeen enterprises which had been among the
in the Hungarian defense industry in defense industry firms listed as top military producers in the peak year
1988. By the end of 1993, at the C+D forming the core of the sector in 1988. of 1988. Mechanikai Muvek and Raba
exhibition4, the Military Industrial It provides a summary of the had not usually appeared on the old
Office made public a catalogue of ownership, production profile, official lists, but they were nonetheless
forty-three private and state-owned organizational, output and workforce renowned military producers.
companies involved in military changes that took place in the sector Hadastechnikai Ipari es Kereskedelmi
production, and in 1997 the between 1988 and 1998. Szovetkezeti Rt. and Antenna-
department of the Ministry of Hungaria Rt. were minor offsprings of
Industry and Trade listed sixty-two A list published in January 1998 formerly important military-related
companies that were or wanted to presented thirteen enterprises in companies.
become involved in defense-related Hungary whose activities held strategic
activity in Hungary. The new firms importance: Dunai Repulogepgyar Rt,
were mainly successor firms FEGARMY Fegyvergyarto Kft.,
established by the managers or Gamma Muvek, Hiradastechnikai Ipari
es Kereskedelmi Szovetkezeti Rt.,

Table 3: Summary of major changes in defense-related companies


Notes: Companies marked with an * are state-owned. Companies marked with ** are joint private and state-owned.
Companies in italics were not listed in the original official list of the major companies in 1988, but are presented in this
study.
Profile change

Conversion Military production Reduced military Predominantly


Restructuring in the waiting production military production

Successful Bakony, Siemens- Videoton, Orion, Magyar Loszergyarto


restructuring Telefongyar TKI*, Kft.*, Dunai,
Gamma, MIKI* FEG-Army*,
Nike-Fiocchi

Unaccomplished Danuvia, BHG*, FMV, Nitrokemia*, Currus*, MOM, Army-Coop,


restructuring EMV Mechanikai Muvek* Mechlabor **

4 Originally ‘Conversion and Defense,’ and


renamed ‘Central European Defense,’ a major
military equipment show organized regularly in
Budapest.

22 B·I·C·C
asset reuse

The Fate of
Military-related centers. However, there were many
efforts on behalf of defense industry
managers and concerned Ministry

Assets officials to rescue as much as possible.


The new products developed by the
surviving military-related R&D centers
discussed below represented a certain
continuity of Hungarian military-
related know-how.

D uring the 1990s the scope of


defense-related activity and the
corresponding workforce significantly
unemployment reached 18.9 percent in
Borsod-Abauj-Zemplen county and
14.2 percent in Sirok, in both cases
Production
decreased in Hungary. However, as higher than the national average.
machinery
mentioned above, most of the military-
A lot of the machinery formerly used
related assets were not converted Know-how at military-related companies was
consciously for civilian use, but were
thrown out, written off, or sold as raw
simply wasted or remained unused. During the very short period that the material when companies went
Later, during the crisis and subsequent authorities proposed conversion and bankrupt or had to radically diminish
slow recuperation of the sector—and many company managers began to their scope of activity and their assets.
of the Hungarian economy as a envisage it as an alternative to military Some of the general-purpose
whole—some of the remaining assets production, many interesting conver- technology could be reused in other
were gradually reintegrated in the sion ideas and products emerged. The production processes, eventually in
civilian economy. most successful Hungarian conversion civilian production, or could be sold.
product was a fire engine assembled on
Workforce a tank chassis, which was used to fight Some of the special-purpose
fires in the Kuwaiti oil fields during the technology was sealed as cold capacity,
At its peak the Hungarian defense 1991 Gulf War. The engineers of but the bulk of it became impossible
industry had employed 30,000 people. Mechlabor designed an electronic to use. Only a few companies were able
According to MHE data, by mid-1998 wheelchair that was extremely versatile to generate revenues from this specific
there were only 5,000 employees in the and cost approximately one-third that machinery. MFS-Magyar Loszergyarto
sector. Many former employees had of similar products on the Western Kft., for example, sold to Eastern
reached retirement age or opted for markets. An important part of the European countries several machine
early retirement. The unskilled workers, knowledge accumulated in the defense chains for ammunition production
women and Roma were made redun- industry was transferred to the civilian which had became superfluous due to
dant on a large scale. This significant telecommunication sector. In the the decrease in production. Bakony
decrease of defense-related employ- absence of military orders, companies was able to generate some additional
ment, however, was eased by the fact which had an important R&D division income by selling its military-related
that the bulk of the defense industry dedicated more energy to the machinery to Vietnam.
was located in Budapest, the economic development of new products for
center of the country, thereby offering civilian use. Gamma Muvek created a Premises
alternative employment opportunities. whole new set of environmental
There, the skilled workers in particular protection and measuring instruments,
In the past, defense-related enterprises
were able to find new jobs relatively MIKI developed new testing and
had enjoyed an abundance of assets
easily. measuring instruments, and TKI
which generally included large
developed innovative new products in
premises. When the companies’
The real problems were felt in the the fields of telecommunication,
financial difficulties became evident,
countryside, in regions where chances microwave optical systems, and even in
many made use of their surplus real
for alternative employment were biotechnology.
estate by selling or renting it out. In the
limited. This was the case in Borsod-
process of diminishing overhead costs,
Abauj-Zemplen County for example, As far as strictly military-related
TKI, FMV and Gamma Muvek used
where DIAG-Army Coop and EMV knowledge was concerned, much was
the income generated in this manner to
were located, or in small settlements lost due to the collapse of large-scale
service debts or cover other
such as Sirok in north Hungary, which military-related R&D and production
expenditures.
was home to MFS-Magyar
Loszergyarto. In late 1997

B·I·C·C 23
brief 14

Siemens-Telefongyar was able to One major obstacle to the conversion Companies that had important
‘reconquer’ its former industrial estate of heavy weaponry facilities and business contacts with Western
once its civilian activities became former military bases was that of enterprises intensified and formalized
stronger. Large parts of the former environmental damage. The these through the formation of joint
headquarters of the company in transformation process at EMV and ventures. In the case of Danuvia this
Budapest had to be emptied during the Nitrokemia, for example, was seriously step did not prove to be very fruitful,
crisis. In 1997 it was decided that the hindered by the burden of environ- while at Nike-Fiocchi it turned out to
two other Siemens companies mental cleanup. be a success. BHG had a long-standing
functioning in Budapest would move production cooperation with the
to Telefongyar’s former industrial Networks Canadian firm Northern Telecom and
estate. the Austrian Telephone Company. The
As noted above, the military-related two enterprises were among the few
There were a few cases in which the sector had long been characterized by Western companies that had
large-scale unused company estates very strong ties of solidarity and collaborated with Eastern European
were constructively reused in the form mutual dependence. In the first period telecommunication companies during
of an industrial park. In these cases of following the systemic changes, the old the Cold War, despite COCOM
‘indirect conversion’ some of the production networks broke down, restrictions. Both companies tried to
former defense-related assets, causing serious bottlenecks in create a joint venture with BHG, but
workforce, technology, premises and production. However, informal when the latter lost two bids for
infrastructure could be reused for contacts among the major actors tender, they abandoned their projects.
civilian purposes. The first successful survived. In the next period of slow In this case the long-standing business
case of this type was the industrial park reconstruction, enterprise manage- relations and the goodwill created in
established in Szekesfehervar, on the ments made new efforts to revive their the past did not prove sufficient
vacant premises of the former Video- social and economic networks, enough to compensate for the weight
ton state-owned enterprise. Some of identifying them as crucial develop- of the new economic and political
Videoton’s cooperation partners were ment assets. alliances.
located here, paying rents and partially
using the workforce released by the Companies used their renewed ties There were companies that lost their
company. The municipal government of cooperation and solidarity to help former production and trade contacts
later established another industrial park each other and lobbied together but nonetheless tried to build new
on the territory of a former Soviet air through the creation of new political ones. Bakony, for example, actively
base, providing additional work and professional representative sought new partners both in the
opportunities for those people who organizations. countries of the former Soviet Union
were laid off during the crisis. and among the Western automobile
Enterprises tried to use their old intra- producers based in Hungary. At the
The creation of industrial parks was sectoral ties for new purposes, as did same time, when it switched to civilian
already underway at the estate of Videoton within its subcontractor production, the company management
Nitrokemia, with 28 companies system. did not even consider using its military-
(among them the US Dow Chemicals) related business contacts with Vietnam
making use of the vacated premises. At the beginning of the transformation to promote its civilian products.
There were also plans to create an period external trade and cooperation Videoton meanwhile demonstrated an
industrial park on the unused premises networks were severely restricted, impressive ability to build up a
of the former Bakony Muvek. The specifically those with the Eastern completely new business partnership
government of Veszprem agreed to European business partners. However, network.
contribute the territory of a nearby company managements with a long-
former Soviet military base. A private term perspective insisted on maintain-
Limited was set up for the purpose of ing their networks in the former
establishing an industrial park geared Eastern bloc even if they were not
towards chemical production at EMV functional at the beginning. Videoton,
in Sajobabony. The municipal Orion and Gamma Muvek, for
government proposed the creation of example, all placed special emphasis on
an industrial park on the territory of maintaining these ties and were able to
the former MFS in Sirok. profit from this continuity later on.

24 B·I·C·C
asset reuse

The military heritage An example of wasted assets: former estate was sold to a German
Magyar Optikai Muvek (MOM) business group. All establishments
The military heritage left its mark on were bulldozed away and the
company trajectories even after they Magyar Optikai Muvek—Hungarian construction of a business and
had stopped producing defense-related Optical Works, Budapest—was one the commercial center began on the
products. In the past, military-related giants of Hungarian precision premises (Figyelö, 6 August 1992;
companies had a specific rationale and instrument production. The Magyar Hirlap, 11 June 1992, 6
pattern of functioning. For decades predecessor of the company was November 1993 and 9 June 1995).
they had operated in a highly protected established in 1900 and had a long-
environment. When the socio- standing tradition of optical and Cold capacities
economic transformations began, the precision instrument development and
question of whether they would production. Its products were well From the early 1990s individual
succeed in converting this heritage into known and exported all over the world. agreements signed by the companies
a development asset or whether it In the late 1980s the company had and the Ministries regularized the
would become a burden for further almost 10,000 employees in its Buda- conditions of maintaining cold
development was one of survival. pest center and branch enterprises capacities in Hungary. The latter
based in the countryside. Due to the contributed to the financial burdens of
Many of the assets—such as extensive loss of its massive Eastern European maintaining these assets. In a very
real estate and diverse production markets and increasing financial restricted circle of companies, state
facilities and activities—which difficulties, the company went authorities provided financial
characterized the companies that had bankrupt by the spring of 1992. contributions to companies in order to
serviced the Hungarian defense During the reorganization of MOM upkeep their military-related productive
industry in the past became dysfunc- the former branch companies became capacities. The Ministry of Industry
tional when the industry collapsed. independent, and several joint ventures and Trade spent a yearly Ft 147 million
Even in cases where some of the and small-scale limited companies, to assist companies in maintaining their
military-related activity could centered on certain segments of the cold capacities, and another Ft 300
eventually be recuperated, many assets company’s previous activities, were million was made available for the
remained superfluous and very difficult established. Some of these companies, same purpose through the Ministry of
to reuse. In the case of DIGEP, MOM, like the German-owned Carl Zeiss Finance (Magyar Nemzet, 10 May
FMV, BHG and Danuvia, once their Hungaria Limited and an American- 1998). In some cases this financial
protected and lucrative military Hungarian joint venture for the support was an important source of
divisions collapsed, the rest of the production of electronic cameras, were cash for the liquidity-strapped
company proved unable to overcome prospering. However, the bulk of the companies.5
this blow. The new civilian companies small-scale successor companies which
created on the vestiges of the former aimed to continue the company’s Cold capacities had to be maintained
state-owned enterprises could hardly development and production traditions by the company, often even after the
survive in the new competitive went bankrupt, including MOMFO enterprise ceased its defense-related
economic environment. This led to an Rt., the firm established at the Buda- production, until the supervising
enormous waste of productive assets, pest center. Ministries authorized their sale. Some
as the case study of MOM, below, companies, such as Mechlabor and
shows. As of mid-1995 there were only two Gamma Muvek, survived thanks to
companies considered successor their fixed military-related assets which
In other cases, however, there was at enterprises of the former MOM. prevented their liquidation. In other
least one—and sometimes more— Schmidt and Bender Hungaria Optikai cases, however, like at EMV, the
civilian successor companies, created Kft., which produced optical unused military-related productive
from the assets of a former defense- instruments, was majority German- assets and the corresponding legal
related enterprise, which became rather owned. With a workforce of eighty- status became a major obstacle to
successful. These could be considered five, it moved to its new premises development.
cases of indirect conversion. This established at the industrial estate of
occurred for example at Nitrokemia, the former FMV. G&D Trade Kft.—
EMV, FMS, and Godolloi Gepgyar. originally a Swiss-Hungarian, later only
Hungarian-owned company—had 200
5 In the case of Eszak-Magyarorszagi
employees and specialized in construc-
tion and geodesic instruments. This Vegyimuvek, for example, it was believed that the
sudden cut of this support was one of the
company provided the occasional reasons that lead to the financial collapse of the
servicing of MOM-produced equip- company (Magyar Hirlap, 7 April 1997).
ment used by the Hungarian armed According to Mr. Kocsis, EMV’s chief engineer,
forces. In November 1996 MOM’s the amount of this support had significantly
diminished by 1990.

B·I·C·C 25
brief 14

An example of partially limited company in overcoming the Defense industry managers could have
rescued assets: Eszak- legal restrictions associated with foreseen the forthcoming crisis, since
Magyarorszagi Vegyimuvek separation from the parent company, there were many warning signs that the
(EMV) this was not the case for the others, WTO system was exhausted. The crisis
which faced bureaucratic formalities in was at the same time disconcerting for
Eszak-Magyarorszagi Vegyimuvek was attempting to claim their the regional authorities, which had just
founded in 1949 for military-chemical corresponding physical assets. been in the process of learning about
production, producing gunpowder and new possibilities and tools available to
its components. In the 1950s additional Between 1992 and 1997 EMV went them for managing their local prob-
civilian profiles were introduced to through several complicated and lems following the reorganization of
utilize the enormous production painful transformation and reorganiza- the regional administration after 1990.
capacities originally established for tion processes. Both output and Thus, regional authorities were faced
military purposes. By the end of the workforce were radically reduced. with the double challenge of having to
1960s the company was producing When the liquidation process began in learn new methods of administrative
gunpowder, drugs, intermediary 1992, there were still 2,000 people and economic management, as well as
pharmaceutical products and fertilizers. working at the company. In late 1997, urgent crisis management. This
480 people were employed by the explains why in many places their
Military-related orders began to Austrian-owned limited and approx- attitude was still rather passive in face
decrease during the 1980s, and by 1986 imately 400 workers at EMV. of the rapidly evolving local
military production at EMV had difficulties.
ground to a halt. All facilities EMV was announced in several
connected to military-related privatization tenders, all of which In some regional economic centers,
production, including a new TNT failed. In 1996 the liquidation agency in however, regional level authorities or
plant, were sealed and turned into cold charge bought back and reunited the the companies themselves were able to
capacity. The existence of this cold decentralized company assets. EMV find an efficient solution to the crisis.
capacity blocked the privatization was finally sold in April 1997 to a In Szekesfehervar and Ajka, for
process, since the prevalent laws consortium formed by Hungarian example, the collapse of the defense
forbade its sale. EMV only obtained companies and private persons. The industry caused a serious regional crisis.
permission from the Ministry of largest shareholder, Budapesti Local regional authorities and mana-
Defense to sell these facilities at the Vegyimuvek—a chemical company gers, however, were able to cooperate
end of 1994. based in Budapest and a major and carry out a genuine transformation
business partner of EMV—wanted to of their area. The new, competitive and
After losing its military orders, in the use EMV’s immense premises for its predominantly civilian regional econo-
early 1990s the company was faced own extension. In May 1998 the my was gradually able to reabsorb the
with the collapse of its large-scale company was resold to the American resources released by the reduced
civilian markets in the CMEA, TRI Limited. All concerned partners defense sector.
principally in the Soviet Union and declared that there would be new
within Hungary. In March 1992 a investments in the company and the Bakony and several other military-
bankruptcy process was initiated problem of environmental damage related enterprises—for example major
against EMV. The company would also be addressed (Kocsis, food factories that catered to the
management tried to avoid liquidation interview, 1997; Napi Gazdasag, 12 armed forces—were based in the
by finding buyers for one of its May 1998). county of Veszprem. Military-related
divisions that had become an indepen- orders were already gradually
dent branch company and was fairly Regional level decreasing in the 1980s, and therefore
prosperous. Its eventual sale to an the region had some time to adapt
Austrian firm further improved its
conversion itself to the changing situation. This
situation. The profits from this sale ‘time allowance’ made the transition
were used to create three other limited In the optimal case conversion should smoother and gave the region better
have taken place at enterprise-level.
companies out of former EMV chances to reinsert itself into a
This could have diminished the waste
divisions. Difficulties were encountered renewed national-international
in the sale of these companies due to of those resources formerly tied to economic network. At the same time
military-related activities. Since genuine
EMV’s military character, since the the existence of several military bases
conversion took place rather rarely in
whole former state-owned enterprise located in Veszprem county—including
consisted of one undivided real estate Hungary, a second best option was one used by NATO—makes it likely
regional level conversion. Regions
property. The new daughter companies that, despite the positive results of
formerly heavily dependent on the
could not own their own premises with both enterprise and regional level
the corresponding territories. Whereas defense industry were seriously conversion, the county will probably
affected when the sector collapsed.
personal connections assisted the first reattach itself to the military economy
(Mazak, interview, 1998).

26 B·I·C·C
new turning point

A New Turning
Point order to obtain the necessary local
references. New hopes were
formulated envisaging the increase of
defense industrial output instead of
maintaining current levels. In 1997/98
B y 1997/98 the Hungarian military
sector had relatively restabilized.
This meant that a few companies, such
1996, and authorities in charge of the
sector were committed to upholding
these capacities (Takacs, 1996).
the representatives of the sector
quickly identified new opportunities
open to the Hungarian defense
as Videoton, Orion and FEG, were industry. First was the relative
genuinely prospering. Others managed In a subsequent article published at the stabilization of the Hungarian
to survive with modest but relatively end of 1997, Mr. Takacs stated that economy, the modest growth of GDP
stable future prospects. Most of the military-related companies in Hungary and the reduction of the budget
companies that managed to keep no longer possessed redundant deficit, all of which made active state
themselves above water had unresolved capacities or a non-productive promotion of certain productive
financial and marketing problems. A workforce. The sector’s productive branches possible. This could
small group of companies could capacity, he asserted, corresponded to potentially include the defense industry.
continue their activities only with state marketing opportunities and was Second, and the more important
assistance. flexible enough to follow what would opportunity, was the country’s
hopefully be a rapid increase in invitation to join NATO.
The relative consolidation of the demand. Most producers had or were
Hungarian defense industry had in the process of acquiring the quality At the opening of the traditional C+D
occurred due to the restructuring certificates indispensable for interna- defense and avionics exhibition in
efforts of some major companies, tional cooperation. Thanks to the Budapest in November 1997, Defense
the increasing participation of continuous development of defense Minister Mr. Gyorgy Keleti stressed
foreign capital, the renewed but technology, the Hungarian defense that the Hungarian defense industry
modest state assistance, general industry had “several products of will recover because it has to be
economic recovery and the country’s advanced (and extraordinary) prepared for the repair of NATO
invitation to join NATO. technology.” At the same time, Mr. weaponry and for cooperation in the
Takacs added, “... the defense industry production of certain military-related
In 1997 only 15 percent of the survives from one year to the other products (Nepszabadsag, 12 November
Hungarian defense industry output was (and often from one month to the 1997). After the change of government
destined for local use, while the rest next) thanks to occasional exports and in June 1998, the new Minister of
was exported. While the Hungarian civilian production. ... It is entirely clear Defense, Mr. Janos Szabo, declared
armed forces generated very few that only an increasing demand by the that defense would require additional
orders for the local defense industry, national defense and law enforcement resources because its budget would be
even this small amount of internal agencies can put the industry on a insufficient to accomplish the tasks
consumption was largely made possible stable path.” (Takacs, 1997a; Figyelö, required of it. He confirmed that the
with the participation of foreign 16 October 1997). Hungarian defense industry had to be
companies, for example through off- revived and Hungarian subcontractors
set deals such as that concluded in These statements marked a turn in should participate in the army’s
1997 with the French Matra Defense official policy. During most of the modernization project (Nepszabadsag,
(Magyar Nemzet, 12 November 1997). 1990s official sectoral representatives 1 July 1998).
According to an article written in 1996 seemed to accept the fact that military
by Mr. Bela Takacs of the Ministry of expenditures, and within these the
Industry and Trade, the Hungarian share of technological development,
defense industry could survive only were modest. Export was considered
through external contacts: finding the principal opportunity for the
export markets, foreign partners and survival of the Hungarian defense
investors. The existing productive industry. By 1997/98 however, it was
capacities of Hungarian defense- regularly acknowledged that a
related companies could cover precondition for increasing exports
approximately 25–35 percent of the was an increase in internal demand in
Hungarian armed forces’ needs in

B·I·C·C 27
brief 14

According to negotiations with NATO According to the agreements all prototypes were produced with some
representatives, Hungarian military interested sellers would guarantee close elements imported from NATO
expenditures are expected to increase to 100 percent off-sets. The sellers also member countries. Specialized
to reach at least 2 percent of GDP by offered special financial solutions to researchers and industry representa-
2000.6 Within the increased military ease the conditions of payment. The tives had also developed a new family
budget, a growing share was promised Hungarian authorities indicated which of handweapons, the Gepard, that was
for development. According to Mr. production areas—electronics, vehicle promoted as a possible export hit.
Takacs’s calculations, the amount might production and software, for
reach an annual sum of Ft30–40 example—would be preferred. Mr. Another sign of the renewed
billion, or between 15 and 20 percent Douglas Miller, representative of confidence in the strengthening of the
of projected military expenditures. McDonnell-Douglas Aerospace, Hungarian defense-related sector was
Even if the most important new mentioned that in the event that his apparent eagerness among both
equipment was expected to be company were to win the tender, it military-related and civilian companies
purchased abroad, Hungarian defense would cooperate with the Hungarian to become subcontractors to the
industry contractors might receive Arzenal, Videoton, Dunaferr and Hungarian armed forces (Heti
more orders from the national armed Graphisoft companies7 (Figyelö, 3 Vilaggazdasag, 20 June 1998).
forces. April 1997; International Herald
Tribune, 20 June 1997; Heti
Another channel through which the Vilaggazdasag, 20 December 1997).
local defense industry was expected to
benefit from the army’s modernization As far as the potential export products
was through off-set deals. In 1997 the of the Hungarian defense industry
French Matra Defense won a tender to were concerned, several were
provide the Hungarian armed forces mentioned at a conference held in
with new air-defense equipment. Budapest in April 1998, organized by
Thanks to the accompanying off-set the Center for Security and Defense
agreement, Ft22 billion worth of Studies—Biztonsagpolitikai es Vedelmi
Hungarian products and work was sold Kutatasok Kozpontja. Hungarian
(Nepszabadsag, 23 April 1998). Also in defense industry representatives
1997, the Ministry of Defense presented a list of recently developed
announced a tender for telephone products destined principally for
centers, and Lucent Technologies, special niches in the world market.
Siemens, Alcatel, Schrack and Ericsson Among them were high-speed code
were invited to participate (Figyelö, 26 deciphering systems, special sensor and
March 1998). Two more tenders of an detector systems, military software,
even larger scale were to be decided by drugs to use in case of nuclear
Hungarian authorities for the purchase accidents, high-caliber special
of a new radio-locator system and the handweapons and automatic rocket
modernization of the fighter air fleet. launchers (Nepszabadsag, 23 April
In the latter case the world’s most 1998).
important producers were coming
forth with promising offers. In 1997/98 several new military-related
products were presented, revealing the
In preparation for the tender for the systematic preparation of the
new fighter aircraft, the Hungarian Hungarian defense industry for the
Ministry of Industry and Trade signed renewal of the sector. The Raba truck-
offset agreements with SAAb- producing company announced that
Aerospace, McDonnell-Douglas the development of a whole new 6 In June 1997, before the NATO meeting in
Aerospace and Lockheed Martin. family of completely NATO- Madrid, Minister of Defense Gyorgy Keleti
compatible military trucks. The declared that he lobbied so defense expenditures
could reach 1.5% of the GDP, but ‘‘only if the
country can afford it. As member of the cabinet,
I also have to think of the needs of education
and health care,” he was quoted as saying. (Heti
Vilaggazdasag, 14 June, 1997.)
7 MDA already had a successful off-set deal in
Hungary. In 1987 the Hungarian Police bought
22 MD-500 helicopters, which were paid for with
Ikarus buses.

28 B·I·C·C
conclusions

Conclusions
most successful companies lobbied
intensely when the opportunity for
state assistance arose. During most of
I n the early 1990s the Hungarian
defense industry went through a
fundamental crisis. The crisis
enterprises’ individual survival efforts
were not coordinated at any level. Even
those companies which accomplished
the 1990s defense industry managers
and Ministry officials alike seemed to
accept the limitations forced on the
manifested the sector’s compounded major internal restructuring found that
sector by the changed economic and
structural problems which had surfaced their efforts proved successful only if
political realities. They maintained that
in response to the economic and they found stable external markets
the sector could survive via export-led
political system changes. The structure and/or sources of finance. Since the
restructuring and eventually growth.
and size of the defense industry had revamped military-related companies
From the turn of 1997/98, however,
been determined by the external needs were principally geared towards export,
more emphasis was placed on locally
of the WTO and the highly protected the structure of the military-related
induced defense industry recovery.
environment in which it had sector in Hungary was principally
Since the modest economic recovery
functioned. This had shielded it from shaped by erratic, external market
made it feasible, the representative
the realities of the Hungarian demand. It did not correspond to
organizations of the sector increasingly
economy. After 1990, however, the ‘natural’ needs—defined by the armed
lobbied for more state orders and
sector had to cope with the dynamics forces’ needs—or political needs
eventually for financial contributions.
of a recently introduced market determined by the interests of state-
Following the invitation to become a
economy and the corresponding level decision-makers. The transform-
member of NATO, Hungary pledged
institutional changes. The official ation of the Hungarian defense
to increase its defense budget. The
protection which had in the past industry could only be achieved with
modernization of the national armed
assured the industry’s privileged large material and human losses. Tens
forces became inevitable. The
existence became weak and of thousands of employees became
modernization projects and the
inconsistent. There was no political redundant, and immense material
increasing competition between major
force, backed with sufficient economic reserves, production machinery and
Western companies to participate in
resources, able to push the sector either know-how was wasted. Very few of the
them provided yet another
towards conversion or a genuine large- formerly military-related productive
development opportunity for the
scale defense industry restructuring. assets were consciously converted for
sector. It is most likely that instead of
Defense industry enterprises were civilian purposes. During the crisis
conversion and integration into the
principally left to themselves to find a defense-related companies were forced
civilian economy, the Hungarian
way out of this situation. By 1995 the to learn independence and become
defense industry will revive in the near
Hungarian defense industry became more efficient if they wished to survive
future.
relatively consolidated. The bulk of the in the new economic environment.
companies which had managed to Those that were able to build on the
survive became more efficient, more positive elements of their defense
flexible and were able to find new industrial heritage and introduced
markets. Through new business fundamental changes in the way the
networks, they were able to mobilize company was run proved to be
external resources for their further successful. These companies placed
development. Those companies that emphasis on continuing R&D
did not succeed in this could still count programs, the preservation of a highly
on eventual state assistance. The skilled team of managers and key
Hungarian defense industry was workers, and adherence to strict quality
reduced to a level at which it could controls. They managed to learn active
survive by and large on its own. The marketing and financial management,
introduced productivity-enhancing
measures and strict budgeting policies,
and established new external economic
contacts. Despite their relative
independence from a politically
determined past and the discovery of
new economic possibilities, even the

B·I·C·C 29
brief 14

Interviews
Spronz, Dr. Imre (Managing
Director) Comasec-Respirator Rt.
Acs, Janos (General Director) and Koi, Miklos (General Manager) Budapest, 16 February 1994.
Gyozo Czene (Economic Deputy Gamma Muvek. Budapest, 3 July
to the General Director) HM 1997. Szabo, Peter (Managing Director)
Currus Rt. Godollo, 1994. Nike-Fiocchi. Fuzfogyartelep, 14
Kovacs, Dr. Geza Peter (President- April 1994.
Baracskay, Jozsef (Technical Deputy Director) Dunai Repulogepgyar Rt.
Director) and Istvan Szajko (Head Tokol, 15 April 1994. Szarka, Istvan (General Director),
of Division) Nitrokemia. Sandor Garabuczi, (Deputy
Fuzfogyartelep, 14 April 1994. Kovacs, Sandor (Head of Depart- Director) and Dr. Gyula Janko,
ment) and Bela Takacs (Deputy) (Deputy Director) Technika
Bodi, Jozsef (Director) and Gyorgy Department of Defense Kulkereskedelmi Vallalat. Budapest,
Rothman (Head of the Depart- Economics. Budapest, 15 April 12 April 1994.
ment of Technical Development) 1994.
Mechlabor. Budapest, 7 July 1993. Takacs, Bela. (Head of Department)
Mazak, Gyorgy (Deputy Mayor of Ministry of Industry and Trade.
Bodi, Jozsef (Director), Gyorgy Veszprem) Veszprem, 3 March Budapest, 24 June 1997a.
Rothman (Head of the Department 1998.
of Technical Development) and Tothszollossy, Dr. Geza (Director
Nandor Opitz (Technical Medgyesy, Janos (Chief Advisor) General) Merestechnikai,
Director) Mechlabor. Budapest, 11 HIH. Hadiipari Hivatal. Budapest, Informatikai Kutato es Innovacio
April 1994. 10 February 1994. Rt (MIKI). Budapest, 7 April 1994.

Buda, Gyorgy (Deputy Director) Megyeri, Sandor (Managing Vari, Janos (Human Resources
Ministry of International Economic Director)Videoton- Director) Budapesti
Relations. Budapest, 29 November Rendszertechnika. Szekesfehervar, 8 Hiradastechnikai Gyar Rt (BHG).
1993. April 1994. Budapest, 4 July 1997.

Erdei, Dr. Istvan (General Director) Molnar, Dr. Laszlo (Special Division Venekei, Tamas (General Manager)
TAKI. Budapest, 3 December 1993. Manager) Mechanikai Muvek. and Tivadar Kover
Diosd, 5 October 1993. (telecommunication profile
Feher, Lajos (Chief Engineer) and Director) Orion. Budapest, 3 July
Jozsef Bernat (Director) DIGEP- Nagy, Sandor (General Manager) 1997.
AG. Diosgyor, 8 July 1993. Finommechanikai Rt. Budapest, 26
June 1997.
Gerlei, Istvan (Director)
Haditechnikai Kutatointezet. Pasztor, Zsolt (Managing Director)
Budapest, 11 April 1994. Matravideki Femmuvek, Sirok,
Loszergyarto Uzletag. Budapest, 7
Hamar, Istvan (Director in Charge) April 1994.
and Janos Medgyesy (Chief
Advisor) HIH, Hadiipari Hivatal. Paulenka, Laszlo (General Manager)
Budapest, 1 December 1993a. and Agnes Medveczki Telekne
(Economic Director) MFS-Magyar
Kemencei, Istvan (Managing Loszergyarto Kft. Sirok, 5 Novem-
Director) Fegyver es ber 1997.
Gazkeszulekgyar Rt. (FEG).
Budapest, 8 October 1993. Sebestyen, Laszlo (Director)
Danuvia Rt. Budapest, 16
Kocsis, Dr. Gyula (Deputy Director) February 1994.
Eszak-Magyarorszagi Vegyimuvek
(EMV). Sajobabony, 20 October Sin, Jozsef (Economic Deputy
1997. Director) Bakony Muvek.
Veszprem, 3 March 1998.

30 B·I·C·C
references

References
Takacs, Bela. 1996. “Informaciok a
HIH, Hadiipari Hivatal. 1993. magyar hadiiparrol.” [Report on the
Ballai, Jozsef. 1995. “Fenyes mult,
“Hadiipari es polgari termeles Hungarian defense industry].
szegenyes jelen, tisztes jovo?”
teruleten erdekelt magyar vallalatok Gazdasag es gazdalkodas, No. 4.
[Bright past, shabby present, decent
future?]. Vilaggazdasag, 4 August. rovid ismertetoje.” [Brief
presentation of Hungarian Takacs, Bela. 1997a. “Penz, paripa,
companies activated [sic] in the field fegyver.” [Money, horses and arms].
Balotay, Kalman. 1993. “Recent
of military and civilian production]. Reform, 25 November.
tendencies in Hungarian R&D.”
Paper presented at a round table Military Industrial Office, Budapest.
________. 1997b. “Jozan es kisse
discussion among defense industry
Kerenyi, Egon. 1993. “Az ipari szentimentalis pillantas a magyar
producers and customers, organised
fejlesztes es a hadianyaggyartas hadiiparra.” [A sober and somewhat
by the Hungarian Ministry of
szervezese az 1938-ban indulo sentimental look at the Hungarian
Defense. Budapest, 25 November.
ujrafelfegyverzesi programmal defense industry]. Magyar Honved,
osszhangban.” [The organization of 4 December.
Bonn International Center for
Conversion. 1996. Conversion industrial development and
production of military material Tothszollosy, Geza. 1993. “The past of
Survey 1996. Global Disarmament,
according to the 1938 plan of the Hungarian defense industry.”
Demilitarization and
rearmament]. Uj Honvedsegi C&D, No. 2.
Demobilization. Oxford: Oxford
University Press. Szemle, No. 9, Budapest.

Brody, Andras. 1990. “A hon Kiss, Yudit. 1997. The Defense


vedelmerol.” [About defending Industry in East-Central Europe.
home]. Valosag, No. 6. Restructuring and Conversion.
Oxford: Oxford University Press.
Csobay, Jozsef. 1990a. “Valsagban
van-e a magyar hadiipar?” [Is the Magos, Katalin. 1994. “Elonyt a
Hungarian defense industry in magyar szallitoknak!” [Preference
crisis?]. Vilaggazdasag, 21 Septem- for the Hungarian contractors!].
ber. Vilaggazdasag, 28 September.

________. 1990b. “A magyar Ministry of Industry, Trade and


hadiiparrol, penzugyi szemmel.” Tourism of the Republic of
[The Hungarian defense industry Hungary, Industrial Department.
from a financial perspective]. 1997. “Brief presentation of
Penzugyi Szemle, No. 1, Budapest. Hungarian companies active in the
field of defense industry.” Budapest.
Eller, Erzsebet. 1991. “Volt, nincs
hadiipar.” [The end of the defense Peredi, Agnes. 1997. “Tizedere
industry]. Figyelö, 14 February. zsugorodott a hadiipar.” [Decimated
defense industry]. Nepszabadsag, 31
Gombos, Janos. 1994. “Hungarian January.
defense industry: Past, present and
future.” Manuscript. Berlin: Berliner Regos, Zsuzsa. 1994. “A hadiipar
Informationszentrum fur Transat- huzoagazat lehet.” [The defense
lantische Sicherheit (BITS). industry can become a leading
industry]. Nepszabadsag, 6 June.

Stockholm International Peace


Research Institute. 1997. SIPRI
Yearbook 1997: World Armaments
and Disarmament. Oxford: Oxford
University Press.

B·I·C·C 31
brief 14

Appendix
Table: Main Hungarian military producers, 1988–1998
Note: Most large-scale companies were divided into several little ones. Only the military-related ones are listed in the
above table. Rt= shareholders’ company, Kft= Ltd.
Enterprise Change of name Organizational change Ownership change

DIGEP-AG Army-Coop- Military division of 100% in private


(Diosgyor) Diag Kft. former SOE became Russian and
independent company Hungarian ownership
Fegyver es FEGARMY Military division of 100% in state
Gazkeszulekgyar Fegyvergyarto Kft. former SOE became ownership
(FEG) independent LTD.
(Budapest)
Danuvia Gepipari Danuvia Decentralization 100% Hungarian
Vallalat Gepipari Rt. private
(Budapest)
Bakony Muvek Bakony Muvek Rt. Major internal 100%
(Veszprem) restructuring Hungarian private
Matravideki MFS- Magyar Military division of 100% state
Femmuvek Loszergyarto Kft. former SOE became
(Sirok) independent company
Gamma Muvek Gamma Rt. Major internal 30% US and 70%
(Budapest) restructuring Hungarian private
ownership
Magyar Optikai MOM Divided into several Hungarian and
Muvek (MOM) Vizmerestechnika Rt; small-scale successor foreign private
(Budapest ) Schmidt & companies ownership
Bender Hungaria
Optika Kft.;
G&D Trade Kft
Finommechanikai -FMV Divisions of former 100% private
Muvek Finommechanikai SOE became German and
(Budapest) Rt. (Budapest) independent Hungarian owners
- HM Radar Rt. companies - 100% state
(Torokszentmiklos) (MOD and AFI)
Orion Yuganskorion, Major internal 100% private,
(Budapest) Orion reorganizations Russian and
Singapure ownership
Videoton Videoton - Military division of 100% private
(Szekesfehervar) Rendszertechnika former SOE became Hungarian owners
Kft. independent LTD
within the holding
BHG BHG Internal 100% state
(Budapest) Hiradastechnikai reorganizations
Rt. divided into 3 Ltd.s
Mechlabor Vidoeton- Decentralization Hungarian state and
(Budapest) Mechlabor Kft. private
TAKI TKI Tavkozlesi Major internal 100% state-owned
(Budapest) Innovacios Rt. restructuring
Telefongyar Siemens- Major internal Joint venture with
(Budapest) Telefongyar restructuring Siemens
Labor MIM - - -
(Budapest)

32 B·I·C·C
appendix

Profile change Workforce Output Status in 1998

100% military 1983–1985: 1983–1985: Suspended


1,300–1,500 Ft1.2 bn–1.7 bn
1997: 320
90% military 1980: 5,000 1994: Ft1.3 bn Good
1993: 500
1997: 660

100% civilian, 1973: 5,000 1990: Ft400 mn Uncertain


but listed as 1997: 197 1994: Ft240 mn
military-related
100% civilian 1989: 4,192 1988: Ft1.9 bn Good developments,
1997: 1,444 1997: Ft4.4 bn but uncertain
90% military 1975: 3,700 1997: Ft45 mn Good developments,
1997: 200 but uncertain
(+ 400)
10% military 1989: 4,000 1989: Ft1.5 bn Good developments,
1994: 230 1994: Ft375 mn but uncertain
1997: 180
Three of the 1986: 3,500 1988: Ft4 bn Mother company
successor LTDs 1992: 1,100 bankrupt, some
were listed as 1997: appr. 400 successors survived
military-related
in 1997

- Mixed profile 1988: 4,000 1988: Ft4 bn Uncertain


- 100% military 1994: 560 1994: Ft1.2 bn
1997: 325

Predominantly 1988: 4,500 1993: Ft0.5 bn Prosperous


civilian, listed as 1997: 240 1996: Ft1.25 bn
military-related
100% military 1988: 6,000 1994: Ft1 bn Prosperous
1998: 200

100% civilian 1990: 8,000 1986: Ft6 bn Bad, uncertain


1997: 300+100+150 1995: Ft2.7 bn

100% military 1988: 2,400 1988: Ft1.7 bn Stable


1998: 200 1994: Ft270 mn
Mixed profile 1985: 1,200 1993: Ft250 mn Good
1993: 300
100% civilian 1997: 382 1997: Ft17 bn Properous

- - - -

B·I·C·C 33
About the Center
The Bonn International Center for national clearinghouse BICC actively
Conversion (BICC) is an independent collects data and information on a
non-profit organization dedicated to range of conversion issues, and pro-
promoting and facilitating the proces- duces a variety of publications analyz-
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resources can be shifted away from the Survey, its series of reports, briefs, and
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tive civilian uses. Through research and ConverNet.
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BICC’s six program areas are:

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Restructuring and conversion of the Phone +49-228-911960
Fax +49-228-241215
defense industry E-mail: bicc@bicc.uni-bonn.de
Internet:http://bicc.uni-bonn.de
Demobilization and reintegration
ISSN 0947-7322
Base closure and redevelopment Layout: Svenja Görgens
Printed in Germany
All rights reserved
Dismantling and disposal of surplus
weapons

BICC is an international think tank,


which conducts research, makes policy
suggestions and facilitates and medi-
ates the conversion process at all lev-
els—local, national, and global. The
Center provides consulting services to
a range of public and private organiza-
tions. In order to function as an inter-

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