Aside from its procurement of military equipment, the Orbán government is becoming increasingly involved on the ownership side of defence industry companies as well and, in laying the foundations for domestic production, hopes for this to bring future export revenues to the country. Bringing arms production to Hungary will, in addition, allow more of the money spent on procurement to remain within the country. Yet, these are decades long commitments, so it remains vital that buyers be found for these products. If the factories cannot sell, the state will be forced to keep investing huge resources to maintain them. In which case, rather than a domestic defence industry developing, financial resources will be drained from the system. As such, until Hungary becomes a weapons exporter, these investments will worsen the balance sheet, i.e., this investment will not become economical so long as production is limited solely to the Hungarian market.
There exist, within the defence industry, certain production capacities which the government wishes to create from scratch in Hungary (e.g, gunpowder, munitions, small arms, and light weapons). Other, however, could not be established for all the money, time, and resources in the world (e.g, major weapons systems and tanks). For these, the government has started to buy itself into the production chain. The plan is that, over time, domestically produced (or assembled) goods involving innovative solutions will be re-sold on the world market, which should, since these companies are minority-state owned, generate significant export revenues. This is, for instance, the idea behind the Lynx-factory.
The fact that the majority of the factories relocating here are German or have German links well befits this conception. In keeping with their political culture, the German government has – at least until the outbreak of war in Ukraine – curbed arms exports and allowed few weapons into active conflict zones. Our political and social attitudes, not to mention legal regulations, differ markedly from Germany’s and so Hungarian manufacture – replete with the benefits of export earnings minority stakes could bring – could pave the way for German products to reach the world market.
Seven priority developments are currently progressing in six different regions, though the formula remains the same: the Hungarian state, as minority owner, has set up joint ventures with the defence industry companies relocating here. The states ownership powers are, in each case, typically exercised through the László Palkovics led N7 Nemzeti Védelmi Ipari Innovációs Holding Zrt (N7 National Defence Industrial Holding Zrt.).
Of the seven factories currently built or under construction, four are linked to Rheinmetall Hungary Zrt.. These four are typically owned in a relation of 51-49% by Rheinmetall AG and the Hungarian state respectively. The increasingly close ties between Rheinmetall and the Hungarian defence industry are clearly evident in the appointment of Gáspár Maróth to the role of Head of Eastern European Coordination at Rheinmetall AG, just five months after his dismissal as State Secretary for Defence Policy and Development in November 2022. The German company has also entered the Orbán regime’s broader corporate empire, with Rheinmetall acquiring, through capital increase and share acquisition, an approximately 25% stake of, one of the Orbán government’s top companies, 4iG. A Hungarian subsidiary has since been created under the name Rheinmetall 4iG Digital Services Kft..
Viktor Orbán giving a speech for the hand-over of the Zalaergeszeg Rheinmetall factory. 18th August 2023. Photograph: Officer of the Prime Minister
In Zalaegerszeg, Rheinmetall Hungary produce the Lynx (Hungarian: Hiúz) tracked infantry fighting vehicle. The construction of the factory cost approximately 170 million USD, while the delivery of 218 Lynx (with the majority of the production in Hungary) will come to around 2,2 billion USD. In addition to the factory, Rheinmetall Hungary has also spent around 120 million USD to build a state-of-the-art, complex vehicular test track, ZalaZone, which will provide testing facilities for drone research alongside combat vehicles.
There does, however, still remain a huge question mark hovering over the Lynxes: it is not yet clear who, outside of Hungary, will buy Lynxes. There are, as of yet, no interested parties and the Slovaks, Australians, and Greeks have all backed out of potential purchases. These countries had even been offered the opportunity to construct separate assembly plants in their country by Rheinmetall, so their production would not have occurred in Zalaegerszeg even if the decision had been positive. Further, as mentioned in our previous article, the Lynx have yet to be tested in combat, nor are they in service with the German armed forces.
One of Europe’s largest ammunition and explosives factories is currently being built by Rheinmetall Hungary in Várpalota, where production is expected to begin in the second half of next year. The state has recently announced a long-term contract (2023-2031) for the purchase of ammunition produced here "worth hundreds of millions of euros". This will at least partly cover the needs of the Defence Forces. Not only will the factory in Várpalota produce ammunition for almost all of the combat vehicles used in Hungary, it will also supply Rheinmetall’s European factory network with the RDX explosives produced there.
In relation to Várpalota, it is also worth mentioning that the Hungarian state – or, more precisely, HDT Védelmi Ipari Kft., which is 100% owned by N7 – has purchased Hirtenberger Defense Systems, a manufacturer of mortar shells, artillery equipment, and ammunition. The company is currently located in Austria, but it is to relocate to Várpalota in the future. From the point of view of the Defence Forces, the acquisition of HDT is understandable as they will profit from the mortar shells produced here. The company’s order books are also full for the next few years (with orders from Denmark and the Netherlands), although there is much competition on the world market from other mortar producers. More important than this, though, may be HDT’s ammunition and explosives business, which will be able to materially contribute to the domestic supply of the Defence Forces.
The factory in Gyula, which opened its doors in July 2022, produces precision parts for Airbus helicopters, alongside door panelling. The factory provides these parts for the entirety of the Airbus family. The plant is run by Airbus Helicopters Hungary Kft., owned in a 51-49% relation by Airbus Helicopters Europe and N7, and differs from other plants in that it was not set up with the specific intention to manufacture/assemble the equipment purchased by the Defence Forces, but "only" to produce a component. It does, though, have a real and secure export market.
Integration of the Turkish developed Gidrán combat vehicle into Hungarian Defence Forces is currently underway in the Kaposvár factory: the vehicle is being fitted out with combat instruments, radio and electronic equipment, and sensors here. The Gidrán is, in principle, licensed from Turkey, but was developed by the Turkish Nurol Makina company in partnership with Rheinmetall, while the factory is operated by Rheinmetall Hungary Zrt.. We do not have to cast our gaze far to find the interests of one of Orbán regime’s favourite entrepreneurs, László Szíjj, tied up with the company: Rheinmetall Hungary does not buy directly from the Turkish manufacturer, but through the intermediary HT Division Zrt., whose ownership is split 50-50 between László Szíjj and Karakus Suat Gökhan, linked with a thousand threads to long-time friend of Orbán Viktor, Turkish oligarch Adnan Polat. The value of the investment in the factory came to 140 million USD, the price of the 40 (300 in the long term) combat vehicles is unknown.
The latest factory construction was agreed at the end of October last year between Rába Autóipari Holding Nyrt., N7 Holding Zrt, and Nurol Makina. According to the plans, a joint venture is to be set up to build a production plant in Gyor, where the Gidrans will be produced. As such, not only will their assembly occur in Hungary, but their production as well – both for use at home and for export abroad. It is unlikely that more Gidrans than now are to be produced in Hungary, rather the parts for the Gidrans currently assembled in Kaposvár will be supplied from production in Gyor instead of from abroad.
In Nyírtelek, Rheinmetall Hungary is currently building a radar and missile technology plant, necessary for the modernisation of the Hungarian air defence system. It is also expected that from 2025, Israeli developed radio locators will also be produced here.
This is not to be the first defence industry related enterprise in Nyírtelek: since 1964, air defence equipment, missile systems and radar equipment have been repaired and maintained in the town and, since 2008, the US company Raytheon has also been operating a missile assembly and maintenance plant in partnership with HM Arzenál Zrt..
Since 2018, HM Arzenál Elektromechanikai Zrt. manufactured small arms for the Hungarian Defence Forces in Kiskunfélegyháza, under license from the Czech company CZ (Ceská Zbrojovka). The factory produces CZ Bren 2 machine rifles, Scorpion EV03 submachine guns, and CZ P-07 and P-06 pistols for the army and police to replace those of Soviet-Russian origin. Under the agreement, Hungary provided the production plant, skilled labour, and the technology, but, according to our sources, production quality was not achieved, skilled labour was in short supply, and there was little market for the Hungarian-made arms.
This is when CZ Group, which acquired US-based Colt in 2021, stepped into the production business, as part of a 51-49% venture with N7 Holding Zrt., to continue producing the aforementioned weapons. There is also German involvement in the factory in Kiskunfélegyháza, although not at the ownership level, as Bavarian-developed sniper rifles and machine guns are produced here.
A joint venture established in December 2022 between German-Israeli Dynamit Nobel Defence (DND) and N7 Holding Zrt. will soon operate in the same part of Kiskunfélegyháza as HM Arzenál. Initially it will produce reactive armour and, later, shoulder-fired anti-tank weapons.
Despite not being located in Hungary, it should be noted that the majority Hungarian state-owned company Aero Vodochody, originally Czech and still operating in the Czech Republic, is a small aircraft production plant from which the Hungarian state is to purchase twelve Aero L-39NG training and light combat aircraft. If the name of the company rings a bell, it is because it was previously 80% owned, if indirectly, by current Minister of Defence Kristóf Szalay-Bobrovniczky. Szalay-Bobrovniczky acquired his stake in the Czech company in August 2021 with the help of a 150 million euro MFB loan and with the backing of a state guarantee. After his appointment as minister, his stake was transferred to the state in two phrases, first to Zsolt Hernádi, MOL’s CEO, and then from him to the state in October2022. (So a businessman with close ties to the government, and with the aid of a state loan, bought a factory, which, after his appointment as minister, he transferred to another businessmen with close ties to the government, and from whom it was then acquired by the Hungarian state).
The government has not opted for those technologies that can be developed with low entry costs, nor is it focusing on developments that will define warfare in the coming decades such as drones, virtual and augmented reality, artificial intelligence, new materials technology, or cyber warfare. Instead, it has come done firmly on the side of so-called diffuse technologies. The never-too-extensive Hungarian defence industry was not really involved in the procurement and development wave. Rather than focusing on existing production capabilities, an approach much more suited to business interests has been taken in the development of this industry by bringing brand new German production to Hungary.
Armin Papperger, President of Rheinmetall, Prime Minister Viktor Orbán, and Minister of Defence Kristóf Szalay-Bobrovniczky (left to right) at the inauguration of the German defence company's armoured vehicle factory in Zalaegerszeg. 18th August 2023. Photo: MTI/Prime Minister's Press Office/Benko Vivien Cher
While the expansion the Orbán regime’s economic clientele is not as conspicuous in the defence industry as in many other areas of life, the classified nature of the contracts and the complexity of the whole system may just be obscuring this. This is attested to by the fact that more and more "Defense" type companies are appearing in the networks of companies linked to the regime’s clientele.
While significant amounts of R&D were carried out in Hungary before the regime change, successive governments let this lapse until the mid 2010s. This has meant all activity within this area has had to begin again from essentially scratch.
The factories relocating here will certainly lead to more knowledge and technology transfer to the Hungarian defence industry. However, as in the automotive industry, it is more than likely that the Hungarian arms industry will become characterised by the assembly of equipment which has been developed elsewhere. That is, it may only serve to bolster our reputation as a country that assembles for others.
It remains to be seen to what extent this wave of relocation will pay off. Although what is clear is that this market environment is certainly on an upward trajectory and there is a better chance than in the past that it will remain viable. In addition, then, to building up a stable customer base, experts suggest that the ‘best case scenario’ from a return on all of this investment perspective would be for Germany to start redeveloping its own armed forces and defence industry. With production for their army in Hungary – with only a slight hint of exaggeration – the Hungarian defence industry would then become part of the German industry. This obviously, however, remains a political decision with too many extrinsic factors precluding the possibility of predicting where we will go from here.
This article was written in the framework of The Eastern Frontier Initiative (TEFI) project. TEFI is a collaboration of independent publishers from Central and Eastern Europe, to foster common thinking and cooperation on European security issues in the region. The project aims to promote knowledge sharing in the European press and contribute to a more resilient European democracy.
Members of the consortium are 444 (Hungary), Gazeta Wyborcza (Poland), SME (Slovakia), PressOne (Romania), and Bellingcat (The Netherlands).
The TEFI project is co-financed by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.
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