The Czech defence industry has experienced significant growth in recent years. In 2023, according to an Ernst & Young analysis for the Czech Chamber of Commerce, the Czech armaments industry's revenues are expected to reach a total of three billion euros (approximately CZK 75.3 billion). This corresponds to roughly 1% of the Czech Republic's GDP. More than two-thirds of these revenues—almost EUR 2.1 billion—came from exports. Between 2021 and 2022, exports from Czech arms companies increased by 350%, driven primarily by direct exports to Ukraine, which surged fortyfold. Additionally, the increased focus on the arms industry by other European countries contributed to this growth. Approximately 130 companies affiliated with the Association of Defence and Security Industry of the Czech Republic employ around 20,000 people. In the next episode of CZ DIALOGUES, we spoke with Lubomír Kovařík, Chairman of the Defence Industry Section of the Czech Chamber of Commerce, about the state of the Czech defence industry and its future.

Video: Interview with Lubomír Kovařík, Chairman of the Defence Industry Section of the Czech Chamber of Commerce / CZ DEFENCE

As the Chairman of the Defence Industry Section of the Czech Chamber of Commerce, how do you evaluate President Trump's announcement to increase defence spending to 5% of the GDP of the alliance countries?

I would perhaps start with the Czech Republic. Last year there was a capping or securing 2% of GDP for defence, i.e. securing the defence capability of the Czech Republic, which is a kind of first stage. We assume that the Czech Army has been underinvested for a long time. At the same time, we are talking about the fact that, at present, the Army of the Czech Republic is unable to meet the original requirements that were placed on it within the North Atlantic Alliance because of underinvestment. These requirements will increase. An agreement was reached last year to increase them. I think they should be approved in March this year. I see President Trump's signal as an impetus for European states to take more responsibility for ensuring their security. This is the kind of impulse that could get us moving more.

Another pressure created by the new US administration was the pressure to buy and acquire US weapons and weapons systems. How will this change the map of the defence industry in the world?

We have to stop again at Europe's current capability. Europe is behind the times, it has to be said. That's why American companies today are on the cutting edge of how they could and do work in the defense industry. Of course, President Trump is promoting America, he is also promoting his national interests. He is pushing for American companies to supply both European and non-European countries. I see this as a big push not only for President Trump to support his own companies, but I also see it as a push for Europe to really increase its contribution to defence security.

We are also observing a trend in the Czech Republic that there are certain defence industry companies that are investing heavily in the United States, establishing branches or even transferring production there. Is there anything we can take inspiration from America?

Without a doubt. There are several reasons why Czech companies, and not only defence industry companies, want to go to America. These are companies in the healthcare sector, for example, and so on. Why do they go to America? First of all, the American market is much simpler in terms of bureaucracy, which is very troublesome for us throughout the EU. The Americans do not have the high input costs that trouble us. Secondly, if Czech companies want to operate on the American market, they must be part of the American market, or they must be in the American market in terms of production. The reason for this, for example, in the defence industry, is that companies wishing to supply the federal armed forces must currently manufacture up to 75% of the value of their product in the United States. In the past, it was 50 per cent. There is talk of the so-called Buy American Act. It was just changed by President Trump in the last term. And President Trump has increased this value from 50% to 75%. I am not surprised, in principle, because this is one of the ways to achieve domestic self-sufficiency, strategic independence. So, President Trump is very strong on that.

How does European arms production fit into this?

If European arms production wants to operate, wants to supply the US armed forces, it must be linked to the territory of the United States.

Is there any other way to take inspiration from the American market? Is there a different climate between armourers, the military and the state?

The market works a little differently. First of all, the market is much more predictable. The cooperation, let's stay with the Ministry of Defence and the Pentagon, with American companies is firstly long-term, secondly predictable in the sense that American companies know where the US military wants to go, what requirements it puts on them. At the same time, the United States, or rather the Department of Defense, the Department of Defense, cooperates very closely in the financial area. They fund research, development, they fund joint projects that lead to the introduction of new products for the US military. And that is something that we have a lot to learn.

Is the European Union or any of the strong European countries a partner for the United States today?

I'm afraid that at the moment no one from the European Union is a partner, not even the European Union itself.

Let's go to Asia now. Recently, strategic cooperation with Vietnam was concluded at government level. What can this cooperation specifically bring to our defence industry?

In general, the relationship between the Czech Republic and Vietnam has been good for a long time, as we know from the past. The cooperation is, I think, comprehensive. It is not just about the defence industry. If we focus on the defence industry, from my point of view it is undoubtedly a great opportunity for the entire domestic defence industry. Let us realise that Vietnam is very heavily armed today. The geopolitical situation in this part of the world is not easy either. Personally, I believe that there is a certain increase in the arming of the Vietnamese armed forces precisely in connection with the arming of China. And the space that I see there today is for Czech companies in that the latest products can undoubtedly be applied there. It is also possible to apply there the so-called westernization, that is, the modernization of the original supplies of Russian origin that are in the Vietnamese army.

So this is a great opportunity...

I think it's a huge opportunity for a lot of Czech companies.

One of the key things for industry in general is mineral resources. Could Czech companies branching out into the Asian and American markets help in sourcing their own production?

It can certainly be a resource. Starting in America, President Trump, who has been quoted and mentioned again, has announced, firstly, pressure on OPEC in terms of reducing the price of gas and oil inputs, and secondly, opening the taps to American producers, which could ultimately lead to a reduction in inputs for the Czech Republic. In general, we are talking about the fact that energy prices in the Czech Republic and in the European Union are very high, incomparably high with the Americans, for example. As regards other resource bases, there is no doubt. If the Czech defence industry has resources, whether in Asia, Africa or America, which will lead to supplies of quality raw materials at lower prices, this will help competitiveness.

We talk about the Green Deal and taxonomy all the time, how much are these blocking the development of industry in Europe today?

I think it is one of the blockers in Europe. Europe is no longer competitive. I read somewhere recently that in the last ten years, the share of European industry in global industry has fallen by ten percent. By the way, the Americans have retained 26%, 27%, and one of the reasons why that is so is Europe's loss of competitiveness. We can look for a number of reasons for this. It is the huge bureaucracy. It is absolutely nonsensical things like the Green Deal and so on. It is a huge burden on individual businesses. It is, of course, a big burden in the form of high inputs that prevent us from producing efficiently and producing very quickly. The so-called Draghi report of last year basically defines all the problems that the European Union has today and suggests how to deal with them. I think it is absolutely essential that this be worked on very intensively at the moment, because if Europe does not wake up, in ten years' time it will lose 10% again, we will have millions more regulations and millions more pointless Green Deals. But it may also end up that we will then produce nothing here.

Has Europe woken up yet?

I don't think it has woken up yet. There are some signs. Coincidentally, we were discussing one of the documents a while ago, which is fresh and deserves to be studied. But I think the wake-up call needs to be much more dramatic and noticeable. The question is how ready Europe is for this wake-up call. I am a little worried that it is not yet.

Isn't it also a question of how prepared the big countries are? The document you are talking about concerns the countries on the north-eastern border of the EU. These countries could make a difference in Europe, could they not?

I hope so. I quite like the Eastern Alliance, as I would call it in my working terms. And in my view, now it's about making a concerted push. Let me give you an example. For example, companies in the defence industry are associated in some interest associations and it is undoubtedly right that we now coordinate our activities towards European leaders. There is one more good example, which I hope will be followed through. We have been pointing out for a long time that there are inconsistencies between certain parts of European legislation. I will give a specific example. The defence industry as such has been designated as a strategic industry, unfortunately because of the conflict in Ukraine. It is clear that if states want to ensure their defence capability, they cannot do so without the defence industry and they must support the defence industry. Today, in one part of the European Union, it is seen as a strategically important industry that must be supported. In the other part, and I am now talking specifically about the European Investment Bank, it is still not seen as something that should be supported at all. Let us remember that the European Investment Bank still has in its statute that it will not finance the production of military equipment, munitions, weapons and so on. Then I ask where the balance is. On the one hand, we are saying let us support the defence industry, because it is a strategic interest of all states, and at the same time we are putting obstacles in our own way so that we can effectively support research, development, production and capacity building in the defence industry.

2% of GDP for defence is guaranteed by law. What do you think is a more appropriate or effective trend – is it better to increase that percentage of GDP or to allocate the costs that we currently need as defence spending?

The optimal option would be, of course, if we could define exactly how much money we need, which we probably know and could allocate. I think that the need for funds to provide for the underfunded Army of the Czech Republic is so great that we cannot get there in one go, but we have to get there in steps. Whether it is 2 per cent or 2.5 per cent, it does not always matter in principle. The larger the percentage, the faster we will be able to retire the debt. But what is essential is that there should be a very strong dialogue between the Czech Army, the Ministry of Defence and companies in the defence industry. It is essential that companies know where the army wants to go. I have talked about this using the example of the United States and cooperation with American companies. It is essential for us as armaments manufacturers to know where the military is going and how we can channel our research and development capabilities into joint projects. On the agenda will also be, let us say, a more effective use of funds for joint research and development in the defence industry so that we will be able to offer new development items for the Czech Army within a few years.

What is your opinion on the reduction of the US participation in NATO and its gradual withdrawal from Europe as it is reported in some contexts?

From my point of view, this has two levels. It is right that there is pressure from the United States for the European Union and the European Union states to take more responsibility for their own defence. That is the right move. What strikes me a little bit is some of the statements made by President Trump to the effect that Europe is over the water, Europe is dealing with Ukraine on its own. Is it America or Europe that has to deal with Ukraine on its own? We must face the threats together. But, of course, this is not just about the Ukrainian conflict, it may be the Middle East, it may be other conflicts. We need to face these challenges together. I see this as a pressure on Europe to focus much more on building and achieving the necessary capabilities so that, in cooperation with the United States as well, we can solve the problems.

We have talked in the past about the impact of banks on the defence industry, what is the current state of this issue?

The situation is much better than it was in the past. I must say that the cooperation with the banks over the last three years has led to the fact that today the problems in the defence industry, I am not saying that they do not exist, but they are absolutely minimal. The banks are making a significant contribution to the financing of the defence industry. In my opinion, there is room for great cooperation in the discussion of how we can combine commercial financing with, say, cofinancing or participation by the Czech state. The Czech state has three instruments, three institutions here. It is the National Development Bank, it is EGAP and it is the Czech Export Bank. We should discuss with the state how the limits for individual countries can be increased so that the strategic interests of the state in individual countries, which will be determined to be strategic, are covered. On 22 January, the Senate passed the National Development Bank Act, which will exempt the National Development Bank from the relevant EU regulation for commercial banks, which in turn significantly helps us to be able to finance and guarantee per partes the State's strategic projects.

The defence industry is growing in our country, that is obvious. What are the benefits and opportunities for the Czech defence industry?

We recently did a study by EY that defined the year 2023. The total sales volume of the defence industry was about three billion euros and employed about 20,000 employees in direct employment. In the complementary part – in indirect subcontracting – it is roughly 30,000 to 35,000 employees. This is, of course, an industry that is strongly export-oriented. Over two billion euros of the three billion euros were exported outside the Czech Republic. The defence industry should be an integral part of ensuring the strategic independence and defence capability of the Czech Republic. As I mentioned at the beginning, without a functioning defence industry, there is no ability to ensure the defence of the Czech Republic. Where we see a lot of room for growth in the defence industry today, and I mentioned this a little bit at the beginning, is not only the Ukrainian conflict, which is gradually being translated into, let us say, much more sophisticated weapon systems. It is also the replenishment of armies as such, the replenishment of depots, the replenishment of different types of armaments, because it is becoming clear that this needs to be worked on. In order for the Czech army to achieve the capabilities it is supposed to fulfil, it needs to invest heavily, and without the defence industry these investments simply cannot be realised.

Collaboration between science, the arms industry, the state and the military is a key formula to keep things moving forward. What can the Czech Republic do to achieve this? Is there a need to change legislation?

I don't think it's entirely about changing legislation. Legislation as such sets the basic frameworks today. Let us remember that we have the Defence Strategy of the Czech Republic, we have the Security Strategy of the Czech Republic. We are currently working on the Economic Strategy, where the strategic role of the defence industry is defined. What I think needs to be completed is in relation to the change or increase in the capabilities that are being placed on the Army of the Czech Republic. We need to complete the Concept of the Construction of the Army of the Czech Republic and then the concept of the different types of troops, which will be the directions for us in the defence industry, where the Army of the Czech Republic wants to go and how we can respond to that. One more thing needs to be said in this context. It is a good thing that we should also have much more dialogue with the Ministry of Defence or the Ministry of Finance. We should discuss how we can finance joint projects in the area of research and development that will build on and support the directions that I have spoken about in the context of the concept of individual types of troops.

Let's get to the guns. How is the CZ BREN 3 doing on the market?

It's doing great. It's not only in demand in the Czech Republic. It follows the modern BREN 2 series, which was created thanks to the cooperation with the Czech Army. Since we don't want to rest on our laurels, we are always in dialogue with our users. This is why BREN 3 was created. Currently, BREN 3 will allow approximately 100 different types of modifications of this weapon. There is an extremely high demand for it.

You are Vice-Chairman of the Supervisory Board of Colt CZ Group. You can see how the group is growing, there have been many interesting acquisitions in recent years. Are you planning any more? Do you still have room to grow as a group?

Our strategy is to grow both organically and by acquisition. In the past year, we made another significant acquisition of a great company called Sellier & Bellot. It's an ammunition manufacturer in Vlasim. We had a conversation a few years ago. At that time I said that our interest was to make our company and our group a one-stop shop. That means that the customer should buy everything from ammunition, guns, accessories and optoelectronics from us. Sellier & Bellot is a very well managed company that is a market leader. Together with Saltech, which is a Swiss ammunition manufacturer under our wing, we already fill a comprehensive range that we are able to offer to our customers. If we're talking about future acquisition targets, we'd like something that's in the optics, optoelectronics area, so that we have that family complete.

How much of the Group's portfolio is arms production and how much is civilian production?

We defined a few years ago that we would like to have roughly half and half, 50% of our revenues from the civilian market and 50% from the Military Forces market. I think we're roughly at that line at the moment.

What developments do you think the Russian-Ukrainian conflict will bring in terms of the defence industry?

Hopefully the conflict will be over soon. That's the first thing. I think the moment the conflict is over, what I was talking about a moment ago will happen. Ukraine's needs will be met in the form of supplies, either from the Czech Republic or from other countries. At the same time, the defence industry of the Czech Republic should, and I hope that it will, work to meet the needs of the Czech Army in a significant way, following the undercapitalisation already mentioned, which is huge today.