Pál Germuska, DSC (National Archives of Hungary) Entrepreneurial skills of state owned military industrial enterprises: Business-making in Socialist Hungary “In general, the defense plant manager appears in many ways to be first a plant manager, and only second a defense plant manager. His concerns are those of plant managers in general, applicable to a broad range of management issues.” (Peter Almquist: Red Forge) 1 In 1976, the Technics Foreign Trade Company (TKV), which has a monopoly on the arms trade, paid an Arab and Swiss businessman a middleman's commission of some £63,000 and $934,000 after export deals worth £3.2 million and $71.4 million. 2 Then, in 1978, the sale of some $70 million worth of Iraqi arms and ammunition was honoured by the TKV with a commission of $853,000. 3 How could a Hungarian state-owned foreign trade enterprise have “extraordinary expenditures” to help business run smoothly in the Middle East or even in Europe? How did the Hungarian economy, and one of its most closed sectors, the military industry, go from a command economy to illegal business practices? The military industry, or more recently the defence industry, is itself a highly complex field, covering industries ranging from vehicle manufacturing to communications technology and chemicals. For us, the military industry is a particularly good field because it was the most radical Sovietized at the time of the introduction of the planned economy, while at the same time, from the turn of the 1960s and 1970s, military products were exported in increasing quantities to non-socialist countries. The impact of all these challenges on enterprises can therefore be well analysed. This paper examines the changing operations of Hungarian military industrial enterprises through the lens of business history, from the nationalisations of 1948 to the late 1980s. It deals with the transformation of the organisational framework and regulatory environment, the gradual move away from the Soviet model, and the ways of adapting to external challenges. Natalya Vinokurova, in her 2018 essay (reflecting on Philip Scranton's article), highlights three main features that she believes most distinguish Western and communist business- making: “The first is the locus and the degree of centralization of the production decisions. 1 Almquist 1990, 65. 2 TKV kimutatás az 1976. évben folyósított rendkívüli költségekről. 1977. január 20. MNL OL XIX-G-3-p 00181/77 (86. d.) 3 TKV kimutatás az 1978. évben folyósított rendkívüli költségekről. 1979. február 14. MNL OL XIX-G-3-p 0072/10/79 (109. d.)
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Pál Germuska, DSC (National Archives of Hungary)
Entrepreneurial skills of state owned military industrial enterprises: Business-making in Socialist Hungary
“In general, the defense plant manager appears in many ways to be first a plant manager, and only second a defense plant manager. His concerns are those of plant managers in general, applicable to a broad range of management issues.”
(Peter Almquist: Red Forge)1
In 1976, the Technics Foreign Trade Company (TKV), which has a monopoly on the arms trade, paid an Arab and Swiss businessman a middleman's commission of some £63,000 and $934,000 after export deals worth £3.2 million and $71.4 million.2 Then, in 1978, the sale of some $70 million worth of Iraqi arms and ammunition was honoured by the TKV with a commission of $853,000.3
How could a Hungarian state-owned foreign trade enterprise have “extraordinary expenditures” to help business run smoothly in the Middle East or even in Europe? How did the Hungarian economy, and one of its most closed sectors, the military industry, go from a command economy to illegal business practices?
The military industry, or more recently the defence industry, is itself a highly complex field, covering industries ranging from vehicle manufacturing to communications technology and chemicals. For us, the military industry is a particularly good field because it was the most radical Sovietized at the time of the introduction of the planned economy, while at the same time, from the turn of the 1960s and 1970s, military products were exported in increasing quantities to non-socialist countries. The impact of all these challenges on enterprises can therefore be well analysed. This paper examines the changing operations of Hungarian military industrial enterprises through the lens of business history, from the nationalisations of 1948 to the late 1980s. It deals with the transformation of the organisational framework and regulatory environment, the gradual move away from the Soviet model, and the ways of adapting to external challenges.
Natalya Vinokurova, in her 2018 essay (reflecting on Philip Scranton's article), highlights three main features that she believes most distinguish Western and communist business-making: “The first is the locus and the degree of centralization of the production decisions.
1 Almquist 1990, 65. 2 TKV kimutatás az 1976. évben folyósított rendkívüli költségekről. 1977. január 20. MNL OL XIX-G-3-p 00181/77 (86. d.) 3 TKV kimutatás az 1978. évben folyósított rendkívüli költségekről. 1979. február 14. MNL OL XIX-G-3-p 0072/10/79 (109. d.)
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The second is the mechanism for coordinating the producers’ actions. The third is the role of state terror in shaping workers’ and managers’ incentives”.4 These issues will also be addressed in our study, but overall, we will see that management techniques in Hungary – thanks to the economic reform – have taken a significantly different direction than in the Soviet Union. We can also anticipate that the isolation of the military-industrial sector – despite government efforts – has been progressively declining since the 1960s, and the management of dual (civilian-military) profile enterprises has been little different from that of fully civilian enterprises.
State owned enterprises and Sovietization
In Hungary, some of the state's holdings in enterprises date back to the 18th century, such as certain agricultural enterprises (Bábolna, Gödöllő, Mezőhegyes) or activities related to regal rights (sole proprietorships, post office). In industry and mining, the nationalisation of private enterprises in the second half of the 19th century led to the accumulation of state assets: mines, railways, heavy industry and arms production (Royal Hungarian Iron, Steel and Machine Factories, MÁVAG). One of MÁVAG's most important customers and business partners was the Hungarian Royal State Railways (MÁV). In addition, it is important to mention the Royal Hungarian Post Office and the Postal Savings Bank, as well as other financial institutions (e.g. the National Association of Hungarian Land Credit Institutions, etc.) from the state portfolio.5 In 1945, about 10% of all employed people in Hungary worked in state-owned enterprises and farms.6
Although the degree of state ownership was not decisive in either industry or arms production, state involvement in production increased significantly during the Second World War. The state placed huge orders for the modernisation of the Royal Hungarian Defence Forces from 1938 onwards, and provided large state loans to private companies for rapid capacity expansion. The companies' boards of directors and supervisory boards were regularly filled by government officials and/or representatives of the army.7 Moreover, under the conditions of war economy, the state had a decisive impact on the allocation of labour, raw materials, energy resources and transport capacity. At the same time, even during the wartime boom, both the state-owned MÁVAG and the private large corporations (Weiss Manfréd Works, Hungarian Waggon and Machine Works, etc.) maintained their civilian production. Thus, in a market economy Hungary, there could be no talk of a separate military industry.
In the Soviet Union, on the other hand, the Stalinist ideology of economic management gradually separated enterprises working for military purposes from the 1920s onwards. In 1936 the independent People's Commissariat of the Defence Industry was established, and from 1939, 4 People's Commissariats were responsible for supplying the Red Army. In 1956, 4 ministries supervised nearly 800 factories of the Soviet defence industry.8 After 1948,
4 Vinokurova 2018, 548. Scranton’s article see: Scranton 2018. 5 Bojkó 1997. For more on the history of the military industry before 1945, see: Dombrády et al. 2016, 12–180. 6 Pető–Szakács 1985, 77. 7 For an example of the Uhri siblings' company (later Ikarus Bodywork and Vehicle Factory), see Bódy 2021. 8 See Table 1.1. Barber–Harrison–Simonov–Starkov 2000, 11.
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when the planned economy was introduced in Hungary, this model was also considered to be the guiding one.
In the last months of the Second World War, German factory dismantling caused even more serious damage to military industries than Allied bombing.9 The losses were further compounded by the Soviet advance during the siege of Budapest and the prolonged fighting in Transdanubia. The Red Army conquering Hungary, ignoring the restrictions of the armistice agreement signed in Moscow on 20 January 1945, engaged in widespread and general looting in the occupied territories. After the end of the operations in Hungary in April 1945, arbitrary factory dismantling reached mass proportions: the Soviets dismantled 80 factories, including almost a dozen military factories, in whole or in part.10 The treaty signed with the Soviet Union on 15 June 1945 ordered the payment of reparations worth US$200 million in the form of the delivery of goods, livestock and machinery. As part of the reparations, the Soviets dismantled and removed most of the military industrial capacity, including the MÁVAG cannon factory in Diósgyőr.11
The coalition government formed under the leadership of the Independent Smallholders' Party after the November 1945 parliamentary elections faced extraordinary economic difficulties: supplying the Soviet army, making reparations, rebuilding the shattered country, and dealing with soaring inflation were huge challenges. The strategic nationalisations, which were included in the coalition programme, began with coal mining (January 1946) and continued with the large industrial concerns (November 1946). The former war factories produced pots, stoves, alarm clocks and various everyday utensils. Only the Metal Goods, Weapons and Machinery Factory produced a few hundred hunting rifles in 1946 – for the Allied Control Commission.12 The Hungarian Communist Party – with effective Soviet help – had liquidated its political rivals by 1947, adopted a three-year reconstruction plan in August 1947, and after the formation of KOMINFORM began preparations for a complete takeover. In 1947 the major banks were nationalized, followed by the aluminium industry, and in March 1948 all companies with more than 100 employees were nationalized in a coup. By 1948, Hungary had become a satellite state of the Soviet Union, retaining its sovereignty according to the letter of international law, but in reality acting under Moscow's orders and in its interests.13
Sovietisation14 permeated every aspect of economic and social life: the introduction of the socialist regime meant the restriction of political rights, the violation of freedom of the press, freedom of information and freedom of religion, the curtailment of the civil sphere,
9 For details on Hungarian property transported to Austria and Bavaria, see: Bálint é.n. 375., 383. 10 G. Vass 2011. 11 Egyezmény Magyarország Ideiglenes Nemzeti Kormánya és a Szocialista Szovjetköztársaságok Szövetségének kormánya között a Magyarország részéről szállítandó áruk ügyében. 1945. június 15. MNL OL XIX-J-1-j KÜM SZU TÜK 18. d. 59/a. For more on reparations, see: Honvári 2012. 12 See details Germuska 2014, 30–43. 13 See in detail Borhi 2004. 14 The transplantation of the Soviet system to Central and Eastern European countries with different historical traditions meant both the transfer of institutions and models of power. In a process broadly termed Sovietisation, Moscow imposed its own institutional structures and their operational practices, including economic, political and cultural subsystems, on the satellite countries. The concept, as Arfon Rees explains, has both an analytical and a normative dimension, and he uses an analytical approach in his analysis. See Rees 2008. Like Rees, I will use Sovietisation as an analytical concept in the following, highlighting precisely its institutional characteristics and specificities.
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the infringement of the right to freedom of movement, the reduction of property and business rights, the introduction of state terror. The introduction of the planned economy was accompanied by the compulsory adoption of Soviet technology and the Soviet production model, a process controlled and monitored by a legion of military and civilian advisers.15 The armed forces of the satellite states were rapidly reorganised, also on the Soviet model, and the medium-term (5 or 6-year) economic plans launched were subordinated to the accelerated development of the armed forces. The new “people's democratic” armies were initially supplied with the second-world-war second-hand equipment of the Red Army. The next step was the establishment of a military-industrial base, for which Moscow had two main objectives: 1. autarky – a country should be self-sufficient in as many weapons and military equipment as possible, and 2. uniformization – all armies in the bloc should be equipped with the same weapons based on Soviet licences.
Command economy and the military enterprises
Although Soviet arms shipments started in 1949, the delivery of the technical documentation needed to organise production and the arrival of Soviet military specialists was delayed. At the same time, the reconstruction plans for the old military factories and the plans for the new factories were almost unanimously based on Soviet documentation. In order to speed up the work, the Soviets provided the Hungarian design institutes with various type designs: construction drawings of the military products to be manufactured, production technology descriptions, the relevant major GOST standards, etc.16 The manufacture of the types of weapons previously used in Hungary was out of the question, and military equipment could only be produced under Soviet licences.17 For reasons of secrecy, the Soviet Union mostly transferred second-line technology. On the one hand, it exported to the satellite countries American and Western technologies imported in the early 1930s, to some extent improved upon. On the other hand, it had no intention of transferring the latest developments and state-of-the-art technologies. The main task of the military-industrial advisers who arrived in Hungary from the spring of 1950 was to manage and monitor the transition to Soviet standards, and it was not possible to deviate from the original licensing specifications, regardless of the technological level of the technology. The changeover also led to serious conflicts, extra work and a lot of extra costs in the production of raw materials, parts, production lines and control.
In Hungary, construction of dozens of new military plants began almost simultaneously under the First Five-Year Plan (1950-1954). Between 1950 and 1953, the value of the output of more than 30 companies belonging to the military industry quintupled, including a 16-fold increase in the production of military equipment. While the old military enterprises continued to have some civilian production, the new plants which started production in 1951-52 produced exclusively military products. The capacity of the latter was designed and
15 On Soviet advisers, see Sablin 2022. On military industrial advisers, see in detail Germuska 2010a. 16 ГОСТ: государственный стандарт/gosudarstvennyy standart, means: state standard. 17 As of 1 November 1948, a dozen of Soviet World War II weapons were regularised in the Hungarian armed forces, and the first specimens arrived soon afterwards to start their production. Gáspár 2012.
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built for mobilisation (war) scale, which could be several times the scale of peacetime production.18
As the new war factories gradually came into production, the need to secure a workforce became more urgent: in 1951, 19,000 new workers were to be employed in the war factories, 60% of them women. In the meantime, about a quarter of the company managers and technical directors in the military enterprises were replaced, many of them on the grounds of political unreliability. At the end of 1951, there were 17 thousand more people working in military enterprises than at the beginning of the year – total of 57 thousand by that time. The artificiality of the pricing system is illustrated by the fact that in the spring of 1951 the government reduced the gross selling price of military products by between 10% and 60%: for example, 120 mm mortar rounds by 40%, machine gun ammunition by 60%, explosives by 10-15% – citing the significantly cheaper end-user prices in the Soviet Union. Of course, the measure benefited the People's Army, which could buy more weapons with the same budget.19
In the factories, the quality inspectors of the People's Army (the so-called military receivers) took over the military-industrial products. Their task was to check the materials used in the manufacture of defence products, the quality of components, semi-finished products and finished products, and compliance with technological and production instructions. The responsibilities of the company management were also laid down in the terms of reference of the military receiver. The plant manager could not change his quarterly or half-yearly plan without a higher order, he could not produce war material not included in the plan, but he had the right to complete his quarterly plan earlier, which had to be accepted by the military receiver. The factory management was left with virtually no room for manoeuvre in military production, and in addition, those who violated the terms of the decree were threatened with three years' imprisonment.20
The complete dominance of the command economy is illustrated by the fact that, following the Soviet model, ministries were no longer simply responsible for the management of a particular economic sector (industry, transport, etc.), but for the operational running of a branch of industry. Thus, by the beginning of 1952, there were seven ministries of industry: six civilian – the ministries of metallurgy and machinery, mines and energy, light industry, agrifood, construction materials and local industry; and one military – the so-called Ministry of Medium Machine-building Industry. From that time, all firms under the supervision of this ministry were reckoned as belonging to the military industry sector.
In reality, enterprises were only able to operate by constantly breaking the rules, ignoring health and safety regulations and working time limits, dramatically increasing the number of serious accidents, while mass production of faulty goods was being carried out due to an untrained workforce. After a warehouse explosion at the Hunting Cartridge Factory in spring 1951, state security arrested the company's technical director and three senior chemical engineers, and removed five senior officials. Suspected sabotage led to constant interference by the Ministry in the company's day-to-day operations. The new infantry ammunition production plants produced an astonishing amount of waste during the trial production: in May 1952, for example, the rate of waste products was over 50% at the Mass
18 On the development of the military industry and the militarisation of the economy, see Germuska 2008a. 19 See details Germuska 2014, 162–164. On new workers see Scranton 2022, 135. 20 239/21/1951. sz. határozat. 1951. augusztus 13. MNL OL XIX-A-98 212. d. See also Germuska 2010b, 323.
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Production Plant and 100% at the Mátravidék Metal Works. By the end of the year, a reject rate of 13-15% was targeted in the two new factories. In July 1952, due to metallurgical technological problems in the Diósgyőr cannon factory, 86% of the gun barrels prepared for drilling turned out to be substandard.21
In sum, the first half of the 1950s can best be described as planning chaos rather than planned economy. The annual national economic plan was usually finalised in March – so the first quarter usually started without a plan, in effect an unchanged roll-over of the previous quarter's plan. Changes in inputs led to numerous plan revisions during the year. An elderly military industry professional during the 1990s recalled an incident when a head of a planning department in the ministry, after being re-accounted for who knows how many times on some production plan, started eating sheets of paper – in other words, he had a mental breakdown.22
In the case of the projects of the People's Army and the military industry, all common-sense building regulations were flouted by allowing construction to begin without (completed) planning documentation, which led to a lot of unnecessary extra work and multiple rebuilding. Thousands of slave labourers and conscript soldiers worked on these construction sites under inhumane conditions, yet the construction industry could not cope with the capacity to build the countless new factories, barracks, shelters, defence camps, etc.23
Conversion of military capacities – new corporate governance challenges
As a result of the rapid development of military forces, in 1952 the size of the Hungarian People's Army reached three times the limit allowed by the peace treaty, i.e. 210,000 soldiers. In 1952, with inflation at 40%, 12% of national income was spent directly on defence. This overspending and overstretching pushed the Hungarian economy into a state near collapse by the turn of 1952-53.24 Following the death of Stalin, Moscow modified the line, and in June 1953 Imre Nagy was commissioned to carry out the adjustment. His reform programme (the so-called "New Course") fitted in with similar reorganisation programmes of the satellite states, which aimed at rapidly improving everyday living conditions - at the cost of moderating and restraining development of the army, military production, and heavy industry.25 Due to a drastic fall in orders from the people’s armies, socialist military industries almost everywhere had to struggle with utilizing technical capacities. In this new situation, Central and Eastern European governments issued orders, chiefly among military industry enterprises, to manufacture articles for daily use, neglected up till that point.
In Hungary, one of the very first measures the Nagy government was to abolish the independent military industry authority, the Ministry of Medium Machine-building in July 1953. Military sector was formally integrated into the Ministry of Metallurgy and Mechanical Engineering (KGM), but it remained separate from the civilian apparatus under the name of
21 See details Germuska 2014, 164–165., 189–191. 22 Géza Ilkó's personal statement. Ilkó spent nearly forty years in the military industrial administration from the early 1950s. 23 See details Germuska 2014, 159–160. See several examples Scranton 2022, 119. and following pages. 24 Germuska 2009a. 25 On Imre Nagy's reforms, see Rainer 2009.
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division “B” (KGM/B) until 1961. Manufacturing plans were modified even more frequently and to a greater extent than previously. At the same time, firms received no mid-term directives from the higher authorities as to whether manufacture of military products would continue, or what new, civilian products they had to prepare for. The supreme political leadership (Political Committee of the Hungarian Workers’ Party and the Executive Council) specified quite general directives stressing the manufacture of articles for daily use, along with agricultural machinery. The changeover was carried out in haste and according to the interests of the moment, and the transition and profile search took four to six years. Many military plants did not receive new products that were best suited to their technological capabilities, but rather products that were in short supply or that other (civilian) enterprises would not undertake to produce. Legally, almost nothing had changed in the planned economy, but at the same time, within the given framework, the company managers were given greater room for manoeuvre. A paradoxical situation was created: in a command economy, military enterprises had to make a rapid adaptation without central directives. As we have seen above, in 1952 the management was not even allowed to change the quarterly production forecasts, and in 1953 it was expected to define the new production profile of the plant, to produce saleable and profitable products.26
In the first few months, the ministry focused on retaining skilled workers, with ad hoc measures to provide enterprises with temporary jobs. Under these circumstances, economy was only a secondary consideration in the reconversion process.27 The government's capacity-fixing decision of October 1953 had an impact that would last for decades, as it seemed a reasonable compromise between the needs of the army and the interests of the national economy. To maintain the production capabilities of the military industry, it was necessary to preserve machinery, tools, documentation, store them properly, maintain them regularly, and track and control the movements of machinery moved within the plant (or possibly loaned to other plants). Therefore, certain military production capacities in the KGM/B companies were itemised and their continued maintenance was required.28
Once the first panic had passed, the Ministry tried to take into account the technological capabilities of the factories when allocating new tasks, and this was already reflected in the 1954 plan.29 However, it was a highly unusual situation in which enterprises had to find their own products and customers for 30-40% of their capacity.30 The earlier austerity measures then took their revenge: the conversion of the plants, which had been designed for single-purpose mass production, entailed extra costs. Newly built factories equipped with modern purpose-built machines produced more expensively than old factories that worked with universal machines that were more than 20-25 years old. It is no wonder that in 1953 the defence enterprises reported a loss of 11% of turnover.31 New resources were needed to
26 See in detail Germuska 2010b. 27 A HT 214/18/1953. sz. határozata, 1953. október 19. MNL OL XIX-A-98 230. d. 28 A HT 240/20/1953. sz. határozata. 1953. november 30. MNL OL XIX-A-98 230. d. Maintaining military manufacturing capabilities then – and in the future – created a number of technological, organisational and financial difficulties and placed a significant additional burden on defence enterprises. Moreover, as time progressed, the assumed restoration time for war production increased, while the emergence of nuclear weapons radically reduced the period of war preparation. 29 A HT 7/22/1954. sz. határozata. 1954. január 11. MNL OL XIX-A-98 232. d. 30 Polgári cikkek gyártása a honvédelmi iparban. 1954. december 31. MNL OL M-KS 276. f. 95. cs. 230. ő. e. 141–143. 31 Vizsgálati jegyzőkönyv, 1954. március 10. HL MN 1954/T 24. d. 3. cs. 1–7.
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make the conversion, especially in the explosives industry, but investment reallocations meant that there was little money for this.
In June 1954, the Central Planning Economics Department of the KGM/B made its first sectoral proposal for new company profiles.32 The concept of a dual profile – military and civilian – was formulated by the KGM in November 1954.33 However, the civilian tasks of the enterprises were beyond the scope of the Minister of Metallurgy and Mechanical Engineering: to develop new economic profiles, the needs of the entire domestic economy would have had to be reviewed and the tasks of the industry as a whole restructured. But this was a challenge that the economic leadership could not meet.
For the defence industry, 1955-56 was a year of constant uncertainty. The phased reduction of the armed forces further curtailed military orders. At the same time, more and more ambitious plans were being drawn up for the supply of arms to the People's Army and the Allied Forces after 1956. However, hardly any of these orders, whether domestic or for export, materialised. At the end of 1955, further layoffs took place in the arms industry.
Several companies built on their later successes in these years by developing and launching a marketable product group. For example, the Hunting Cartridge Factory, looking for a manufacturable product for its cutting machines used to machine the fuzes of artillery ammunition, started to produce small electric motors. Then, in 1954, it created a prototype for a new civilian radio set. In 1955, this plant in Székesfehérvár started to produce 40 000 units of this R-545 transmitter, in response to strong public demand. Due to the lack of background industry, the Hunting Cartridge Factory also launched to design and manufacture electronic components (e.g. capacitors, winding machines, etc.).34
During the October Revolution of 1956, the workers and technical intelligentsia of the military factories were united in their support for change, and workers' councils were formed, which took over the management of the companies everywhere. After the Soviet military intervention, the workers' councils of the military enterprises joined the regional and central workers' councils in Budapest. The revolutionary committee of the ministry itself reviewed a number of enterprise managers.35 Then, as the reprisals unfolded, communists took control of the workers' councils and abolished factory self-management. In any case, according to March 1957 statistics, a quarter of the enterprise directors in the military industry had been replaced by the workers' councils with the approval of the ministry.36 Under pressure from the enterprises, the most incompetent and politically compromised managers were replaced, and mostly respected professionals were appointed as directors.
Orders for the People's Army, reorganised with 40% of its former strength, continued to fall, with just 7% of the output of the military-industrial sector being military. At the same time, in 1957, in order to improve the domestic market, they had to produce twice as many radios,
32 Hadiipari vállalatok katonai és civil profilja 1954-ben. MNL OL M-KS 276. f. 95. cs. 224. ő. e. 147–164. 33 According to this provision, „... a secondary profile is defined as separate branches of production in which the existing demand is not intermittent but is foreseeably constant or increasing; which ensure the utilisation of existing equipment while maintaining the technical capacity of the undertaking unchanged; and whose production can be suspended in the event of mobilisation.” MNL OL M-KS 276. f. 95. cs. 224. ő. e. 199–200. 34 Károly Jánosné: A speciális híradástechnika kialakulásának történeti leírása. A hadiipari gyártás alakulása a Videotonnál. Kézirat, 1985. HL MN Különgyűjtemény. IV/B-40. 35 Felhívás a KGM főosztályainak, önálló osztályainak és ipari igazgatóságainak forradalmi bizottságaihoz. 1956. november 26. PIL 290. f. 36. ő. e. 7. On workers’ councils see in detail Pittaway 2007. 36 Feljegyzés a KGM területén működő munkástanácsokról. 1957. március 2. PIL 290. f. 37. ő. e. 1–4.
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60% more aluminium containers, 40% more sewing machines and 25% more motorcycles.37 Military production reached its lowest point in 1958, with only 4.4% of the total output of military enterprises. The production of consumer durables, on the other hand, multiplied: scooters increased by 19 times, vacuum cleaners by five times, washing machines by three times and sewing machines by 60%. The government made it a priority to start production of household refrigerators, television receivers and various electro-acoustic equipment (record players, etc.). The technical development chapter of the plan specifically emphasised the modernisation of the production of geodetic instruments, microscopes, radios and various instruments, on the grounds that “we should be competitive on the world market and work at a reasonable cost price”.38 Companies have become increasingly autonomous in their efforts to establish long-term sustainable civic profiles, develop products and license new products. Several brand names were then engraved in the memories of Hungarian consumers for decades: the Berva moped, the Danuvia-125 motorcycle, the Munkácsy TV, or the Super 100 refrigerator.
In the search for the definitive civil profiles, much depended on the situational awareness and initiative of individual company managers. For example, Ignác Gorjanc, the director of the Jászberény Metal Printing and Plate Factory, and his chief engineer invented the production of refrigerators alongside the manufacture of soda siphons, aluminium containers and barrels. Few people believed that 20,000 refrigerators could be sold in Hungary every year, but in 1957 it was finally decided to concentrate the production of refrigerators, which was in its infancy, in one place. The first prototype of the Super 100 refrigerator was completed in Jászberény at the end of 1957, and series production started in 1958. In the following years, the plant, renamed the Refrigeration Factory, introduced a number of new technologies (powder coating, vacuum forming of thermoplastics, shielded arc welding, etc.) that significantly increased its productivity and cost-effectiveness. In 1961-1962, the first 120-litre compressor refrigerator and a 70-litre absorption household refrigerator prototype were developed. The Refrigeration Plant placed particular emphasis on product and product development, for which it rapidly expanded its research and development department: in 1959, a graduating class of nearly 20 engineers was recruited from the Miskolc University of Heavy Industry.39
The conversion of military production was extremely challenging, because these enterprises had hardly produced any civilian products in the previous years, and most of their military products were based on Soviet licences, with little independent research and development. The enterprises had to find a new profile, new substitute products, and put them into production, while maintaining their military production capabilities and equipment. The changeover also meant diversification of production almost everywhere: the production of a wide range of products, some of which were the result of independent development, rather than a few large-scale licensed products. A major factor was now the entrepreneurial attitude of the management: in addition to the often dumped military orders, they had to build up relationships with a large number of trading partners and meet consumer demands and fashions. What we can see, then, is that Hungarian industrial governance has gradually departed from the Soviet model in an experimental, evolutionary way. The management
37 A KGM/B 1957. évi terve. 1957. május 22. MOL XIX-A-98 1. doboz (d.) 2. kötet. 38 A KGM/B 1958. évi terve. 1958. március 13. MOL XIX-A-98 1. d. 5. kötet. 39 Szemelvények a Hűtőgépgyár történetéből 1984. Kézirat. HL MN Különgyűjtemény. IV/B-55. 31–35., Kiss 2003.
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system remained within the framework of the plan-guided model, but the detailed rules were rationalised overall. From 1953 onwards, terror was replaced by individual and enterprise incentives, which clearly led to more efficient corporate management.
From 1959 onwards, the companies again had more military orders, but more than 50% of consumer durables were still produced here, and pharmaceutical raw materials, herbicides and packaging remained key products. In the early 1960s a retrospective account was taken of the subsidies that had been paid out in earlier years to reduce the losses of the enterprises. The Ministry of Finance counted the subventions as cost-cutting subsidies – some HUF 600 million between 1955 and 1960, which was one-fifth of the money spent on the development of the defence industry between 1950 and 1955! Taking these subsidies into account, the cost level of the defence enterprises was hardly worse than that of the civilian engineering enterprises. As the civil profile of enterprises stabilised by the end of the 1950s, their performance indicators improved.40
On 1 January 1962, the section of military industry (KGM/B), which had been partially autonomous since 1953, was abolished and the military-technical companies were reintegrated into the civilian ministries:
⎯ Three explosives industry enterprises (with 7000 employees) were incorporated into the Ministry of Heavy Industry (NIM).
⎯ Two optics enterprises and a research institute with 7300 employees were integrated into the Directorate of Instrumentation of the Ministry of Metallurgy and Mechanical Engineering (KGM).
⎯ Three enterprises and a research institute with 10600 employees were moved to the Directorate of Communications Technology of the KGM.
⎯ Twenty defence enterprises, two service enterprises and a design bureau were created to form the Fine Mechanics Directorate of the KGM.41
As a result of the organisational restructuring of economic management in the Soviet Union and in several socialist countries, and in order to address the efficiency problems experienced, sectoral mergers of enterprises were also started in Hungary from 1959. The Hungarian National Beer Industry Enterprise, for example, was one of the first to be set up, merging the four large breweries. In February 1962, the HSWP Central Committee decided that, in order to concentrate productive forces efficiently in industry and construction, companies with small productive forces should be merged. From autumn 1962, the government's Economic Committee approved a series of company integrations: the Sugar Industry Enterprise was created from 11 sugar companies and a research institute, and the confectionery companies, which had already been merged into six enterprises, were merged into a single company, the National Confectionery Enterprise. By 1965, the number of enterprises had almost halved compared to 1950, from 1 427 to 839. With concentration, however, the average number of employees per company tripled, from 336 to 1 183. Most of the industrial directorates, which had been the level of management between the
40 Jelentés a KGM/B-nél termelt cikkek gazdaságossága, különös tekintettel a haditechnikai cikkek gazdaságosságára című témáról. 1961. január 25. MNL OL XIX-L-1-c 27. d. 41 Germuska 2014, 329–330.
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ministry and the company, were abolished, but 17 new trusts were created, which in fact had similar sectoral management functions.42
In the course of the reorganisation, the logic of bureaucratic management actually triumphed once again, monopolies were created with the one industry-one enterprise solution. From the mid-1960s onwards, the Hungarian corporate structure resembled an upside-down pyramid: at the top were the new mammoth trusts, with 10-15 provincial factories, plants and affiliates.
A significant number of military companies at the same time avoided this kind of centralisation because of their specific tasks. The arms and ammunition manufacturing companies and military repair bases remaining with the Fine Mechanics Directorate, there were ideas to organise the production of artillery and infantry ammunition into a single large company, similar to the mergers and trusts carried out in the civilian sector. However, after further investigation, the Fine Mechanics Directorate abandoned the plan on the following grounds: factories with identical or almost identical profiles were strategically distant from each other (such as the Veszprém Metal Processing Company and the Mátravidek Metal Works in Sirok); the independent management of military plants scattered in the countryside for defence reasons would be made difficult by mergers; and the final sorting out and homogenisation of civilian profiles and the introduction and concentration of certain new profiles in the companies belonging to the Directorate were unavoidable. The Fine Mechanics Directorate therefore proposed only three mergers, two of which were approved by the Government's Economic Committee. The KGM expected the new organisational structure to lead to a “high degree of concentration and homogenisation of civilian production in the Fine Mechanics Directorate, in addition to its homogeneous military production, which represented 20%”.43
Fast expansion through exports
The army modernisation programme launched in the early 1960s meant that the military industry had to take over the licences for dozens of new military products from the Soviet Union, which caused considerable difficulties. Based on the experience of previous licence transfers, the KGM estimated that at least five years were needed to prepare a product for mass production: one and a half years to receive the documentation, one year to process the documentation, one and a half years to procure parts not produced in the country (organising the acquisition), and one year to produce test samples and pilot series. As 95% of the military equipment produced was under Soviet licence, speed of adaptation (or perhaps more correctly, slowness) was essential.44
In the spring of 1961, it soon became clear that much faster start-ups than those mentioned above would be needed. At its meeting in Moscow in March 1961, the Political Consultative Committee of the Warsaw Pact adopted a programme for the development of military
42 Berend 1988, 138–150. 43 A Finommechanikai Igazgatósághoz tartozó vállalatok átszervezése. 1963. szeptember 19. MNL OL M-KS 288. f. 25. cs. 1963/49. ő. e. 198. 44 Jelentés a KGM/B 1960. I. félévi hadiipari termelésének helyzetéről. 1960. augusztus 26. MNL OL XIX-A-98 3. d. 15. kötet.
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forces worth billions of roubles, the implementation of which was accelerated in the wake of the Berlin crisis in August.45 Moreover, the Hungarian military-industrial companies were producing more and more products not only for the domestic armed forces, but also for the Allied armies. It is little known that one of the standing cooperation commissions of the CMEA, set up in 1956, was responsible for coordinating military-industrial cooperation. The very first division of labour agreement was reached in June-July 1956 in the military industry, when the Warsaw Pact member states divided the production of more than 70 types of weapons, vehicles, instruments and military equipment between them. Then, the summit meeting of the leaders of the Communist and Socialist parties on 20-23 May 1958 laid down the principles of international division of labour and specialisation of production in both the civilian and military sectors. An important step forward in international cooperation was the framework regulation adopted by the CMEA Standing Commission for the Military Industry in April 1963, which listed among the basic objectives of division of labour and cooperation the rational utilisation and development of existing capacities and the upgrading of the technical quality of manufactured products. Cooperation was useful for the Soviet Union because it allowed it to lighten the burden on its military industry and to concentrate its resources on the development of advanced technologies. At the same time, it was also beneficial for Hungary, because the specialisation helped to stabilise its military industry and to expand exports, which were able to compensate to an increasing extent for the high level of arms imports.46
The Hungarian Second Five-Year Plan (1961-65) aimed to stimulate economic growth through a rapid expansion of machinery exports, and the HSWP Central Committee in its June 1962 resolution also dealt specifically with the military industry. On the one hand, it called for the large-scale production of consumer durables (motorcycles, bicycles, sewing machines, household appliances), which would be more economical and lower in price, and on the other hand, for the machinery industry to “supply the armed forces with the military equipment envisaged in the plans, in compliance with the deadlines, and to ensure the full implementation of our obligations under the Warsaw Pact” – the Party resolution stated.47
Thanks to the CMEA cooperation, the share of exported products in Hungarian military sales almost doubled within 5 years: while in 1963 it was 24%, in 1967 it had reached 47%. The most dynamic increase was in the export of communication equipment and instruments, based on Soviet licences, which Hungary undertook to produce during the specialisation process – their share of military output exceeded 50% by 1967.48 In half a decade, these two sectors became dominant in exports: while in 1961 the share of military radios, locators, chemical defence, nuclear and infrared instruments in military exports was barely 2%, by 1967 it had risen to almost 60%.49
The other dominant branch of the military industry in the 1960s was vehicle production, which in turn achieved a share of almost 30% of output as a result of Hungarian
45 Mastny–Byrne 2005, 116. and following pages. 46 See details Germuska 2015. 47 Az MSZMP KB határozata a gépipar helyzetéről és további feladatairól. 1962. június 28–29. MNL OL M-KS 288. f. 4. cs. 48–49. ő. e. 267. 48 A hadiipar helyzetének és szerkezetének alakulása 1963–1967. évek között. Budapest, Központi Statisztikai Hivatal, 1968. 6. 49 A Külkereskedelmi Minisztérium Műszaki Főosztályának jelentése az MSZMP külkereskedelmi minisztériumi szervezete párt végrehajtó bizottságának. 1968. március 10. MNL OL XIX-G-3-ae 39. d.
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developments. The Hungarian Wagon and Machine Works in Győr (later RÁBA), in cooperation with the Military Technical Institute and other enterprises, constructed the armoured reconnaissance floating vehicle (D-442, FUG) in two years, which went into series production in 1964. Its upgraded version with weapons, the armoured transport combat vehicle (D-944, PSZH), went into series production in 1969 and was produced in hundreds of units per year until 1978. Of the two armoured vehicles, 5141 were produced over 15 years, of which a total of 3103 (60%) were exported.50 However, the profitability of the production of the D-442 (FUG) was already greatly impaired by the fact that the Allied countries placed considerably fewer orders for the vehicle than had been indicated in their preliminary requisition. This phenomenon became a recurrent problem for the otherwise steadily expanding Warsaw Pact exports.
International cooperation was significantly lower for the explosives industry enterprises belonging to the Ministry of Heavy Industry (NIM). They exported little of their already small military production, and the technological disadvantages of the plants built in the early 1950s were becoming increasingly apparent. The Ministry of National Defence (HM), in a kind of relic of the Stalinist doctrine, was adamant about maintaining its huge wartime production capacity for gunpowder and explosives, but its actual orders for ammunition (and thus the supplier obligations of the gunpowder manufacturers) were declining year by year. In the mid-1960s, the NIM sought to make some improvements to the explosives industry's production facilities through minor refurbishments and investments to replace the most dangerous and critical operations.51 Without a substantial order, any major investment was unlikely to be profitable, so the patching and fixing continued for decades. Low capacity utilisation similarly affected ammunition manufacturers and their other cooperation partners (ammunition cartridge case manufacturers, etc.).
The various analyses carried out in 1963-65 all pointed to the need, in a situation of stagnating or declining domestic demand, to give preference to military engineering enterprises producing for export and to concentrate further development on those branches of industry which were profitable exporters.52 In the second half of the 1960s, exports repeatedly approached or even exceeded sales to the Hungarian armed forces. During the period of the Third Five-Year Plan (1966-70), the military and civilian industrial development goals and efforts were already complementary and mutually supportive, with the road vehicle production programme, which strengthened the mechanical engineering industry, and the computer technology priority programme concentrating on essentially the same group of companies as the military industrial developments: Csepel Automotive, the Hungarian Wagon and Machine Works, Videoton, etc. It was in these years that the dual-profile large companies became the driving force of domestic industrial exports.
50 See Germuska–Honvári 2014. 51 A NIM hadiipari kapacitásai. 1964. augusztus 18. MNL OL XIX-A-98 87. d. 80. t.; a HB 9/162/1964. sz. határozata. 1964. augusztus 27. HL HB iratok 2. d. 52 Az 1964. évi exportgazdaságossági mutatók felülvizsgálata. 1964. június. MNL OL XIX-A-98 87. d. 79. t.; Az 1965. évi hadiipari gyártmányok exportgazdaságosságának elemzése. 1965. május 31. MNL OL XIX-A-16-aa 110. d.
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New Economic Mechanism and the business environment
The economic difficulties of the mid-1960s and the malfunctioning of the economic governance system forced the launch of major reforms. Military enterprises also experienced difficulties due to regulatory complicities and excessive centralisation. Even before 1968, these companies were burdened with the costs of the military industrial capacities maintained on the orders of the state, but the state budget almost automatically reimbursed the costs. The situation changed rapidly with the introduction of the New Economic Mechanism (NEM).
A little known but relevant fact is that two basic concepts crystallised during the preparation of the reform of the economic mechanism in 1965-1966: variant A and variant B. The most important theses of variant A can be summarised as the need to remove orders from the management system and to operate the economy more efficiently through indirect regulation, based on material interests and relying on greater autonomy for the enterprise. Option B saw plan orders as an instrument that was an integral part of the management system and should be retained. Variant A prevailed in the preparatory discussions and entered into force in the civil economy on 1 January 1968.53
At the same time, a refined version of the command-and-control system was introduced in the military industry, in practice implementing variant B, by adapting the general rules. The scope for manoeuvre of military technology companies was very limited, on the grounds of defence interests. The role of regulations and instructions remained decisive for the most important tasks.54 Medium-term five-year plans, approved by the Government’s Defence Committee, were mandatory and were primarily intended to prepare for production. In the case of the short-term (annual) military technology plan, the Defence Committee approved the priorities in the form of directives for the plan. In the section on production and distribution, the Committee laid down some 30 to 40 production tasks with instructions. Deviations from the instructions could only be made if the Defence Committee approved them. The pricing of military equipment was largely determined by the authorities. The new regulations, which came into force on 1 January 1968, thus sought to exclude all market factors from the military sector, but with the growth of exports outside the Warsaw Pact this was becoming increasingly difficult to maintain.
However carefully the economic reform had been prepared and adapted to the specific characteristics of the defence sector, it was surprising how quickly, within a few months, the problems that had remained unresolved in previous years had emerged. Under-utilised but still operating hot capacities and the maintenance of unused cold capacities had already represented a considerable additional cost for enterprises, but it was only after the reform that their profit margins were so badly affected by these extra costs.
According to a survey carried out at the end of 1968, 12,000 machines were reserved in KGM companies to maintain mobilisation capacities, 10% of the Ministry's machine park, some of which were stored in warehouses (such as machines for the production of ammunition that could not be used for other purposes), others were used for the production of civilian or military products. Capacity utilisation varied considerably from one sector to another.
53 Vígvári 1989. 54 The detailed regulations see A HB 13/187/1967. sz. határozata. 1967. május 11. MNL OL XIX-A-16-aa 112. d. A haditechnikai tevékenység új tervezési rendjének szabályozása. 1967. december. MNL OL XIX-F-17-s 25. d.
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Communications and instrumentation enterprises were able to convert capacity quickly and had significant civilian production. Weapons manufacturers found their replacement profile relatively well with the production of hunting rifles, machine tool accessories and forklifts. The infantry ammunition manufacturers, due to the low ammunition order, picked up and stockpiled the machines of the mobilisation capacity, replacing them with metal packaging (Mátravidéki) or automotive fittings (Veszprém).55
Table 1 in Appedix provides details of the subsidy needs of companies in the engineering (KGM) and explosives (NIM) industries. Among KGM companies, ammunition manufacturers were the main beneficiaries of capacity maintenance subsidies, while NIM companies required all of them. Exports could also be maintained and increased through state subsidies - albeit at decreasing subsidy intensities, as shown in Table 3 in the Appendix. Export subsidies were also available to ammunition producers and vehicle manufacturers. Of the HUF 9.2 billion worth of military products sold abroad between 1968 and 1972, 23% had to be subsidised to avoid losses. In five years, 306 million Ft was paid out in subsidies on 1.8 billion Ft of exports to the socialist market. Third world deliveries from 1967 onwards were generally so profitable that no state intervention was necessary. At the same time, following lobbying by enterprises, the government allowed military exports to the capitalist market to receive export subsidies similar to those for civil exports. In 1971, the National Planning Office assessed the impact of the NEM on the defence industry and concluded that, contrary to expectations, there was a need to move away from general regulation of defence companies - and to introduce a range of preferences to keep them viable. One such measure was the 10% allowance for military production workers, payable from 1971, which was paid to 20,000 workers in 1974. A significant and important element of the budgetary allocations was the subsidy for financing technical improvements. Then, from 1972 onwards, the industrial administration allocated a considerable amount to replenish the working capital of developing firms in order to ensure the liquidity necessary for a steady increase in production.
If we add up the various state subsidies, we can see that in the period of the 4th Five-Year Plan alone, the state budget paid out HUF 2.5 billion for such purposes. This is a very significant amount compared to the HUF 33 billion of military equipment sold between 1971 and 1975. It is not incidental, however, that the subsidy, which represented 7.5% of the military industry's total revenues, helped to put the sector on a sustained growth path. The data series in the Appendix show that the largest share of state aid (more than HUF 1 billion) was spent on development and modernisation in the mechanical engineering enterprises, while in the chemical industry it was used to maintain the status quo. It can also be interpreted as narrow-mindedness that in the case of the explosives industry, HUF 670 million was paid out of the budget in annual instalments between 1971 and 1975, rather than a one-off decision to start the necessary reconstruction. The delay in investment only prolonged the crisis of the explosives companies, while at the same time the comprehensive reconstruction could not create a market for their products.56
As in the period of the Third Five-Year Plan (1971-75), the vehicle industry was the main driver of industrial production in Hungary, so in the period of the Fourth Five-Year Plan
55 A KGM területén lévő hadiipari kapacitások új mechanizmus körülményei között jelentkező gazdasági problémái. 1968. október 8. MNL OL XIX-A-98 92. d. 116. t. 56 See in detail Germuska 2014, 434–441.
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(1971-75), the communications and instrumentation industries were the main sectors. In the first half of the 1970s, the so-called selective development policy (emphasis on profitable, exportable sectors) also led to a shift in investment resources, with the communications and instrumentation industries coming in second and third place behind the automotive industry (25-33%), with 16-20% and 8-12% respectively.57 This trend was reflected in the large-scale modernisation of Videoton, the Fine Mechanical Company (FMV), the Telephone Factory, Gamma and the Mechanical Laboratory, which resulted in the production of increasingly sophisticated communications and reconnaissance equipment, night vision sensors and nuclear instruments in significant quantities.
Economic reform (NEM) has therefore also posed significant challenges for the management of defence companies. They could not escape from the military production tasks prescribed by the state, but could only ask the central budget to alleviate and compensate them for the economic and financial disadvantages resulting from them. In this way, the reform reinforced previous trends. Sectors that were highly export-oriented (communications, instruments, vehicles) expanded rapidly, with enterprises setting up new factories to maintain the pace of expansion. In addition to public working capital support, these enterprises have increasingly relied on bank loans for their development. Repayment of these loans required prudent management and continuous innovation and product development, both in civil and military products. The explosives industry, on the other hand, was trapped without competitive export products, and decades of unused capacity only served to preserve its position.
Impact of globalization
The rearmament of the Middle East following the 1967 Arab-Israeli war brought a rapid expansion of export opportunities for military engineering companies. The pro-Soviet regimes in Egypt and Syria (and later Iraq) required huge quantities of military equipment, and specialisation within the CMEA enabled Hungary to take a share of the business with small arms, anti-aircraft guns, armoured vehicles and communications equipment. Hungarian arms exports to the developing world really started to rise drastically after the 1973 Arab-Israeli war, doubling in 1974 and tripling in 1975 compared to 1973. Thus, between 1971-75, Hungary sold some USD 91 million worth of arms to Iraq, Syria and Egypt.58 Arab countries were initially buyers of almost all military equipment, but in the second half of the 1970s they increasingly sought advanced communications equipment and complex systems.
Shipments to the Third World have now become a priority not only in terms of filling capacity, but also in terms of improving the capital account of foreign trade by boosting dollar earnings. In the first half of the 1970s, the Technics Foreign Trade Company (TKV) was already carrying out intensive market research in Libya, in addition to Algeria, Egypt, Iraq, India and Lebanon. One of the first major export contracts was concluded in August 1977 with the Libyan Arab Socialist People's Republic, which wanted to obtain immediate access to arms for operations against Egypt, worth some USD 13.5 million. However, the deal
57 Germuska 2013. 58 Jelentés a Honvédelmi Bizottság részére. 1976. július. MOL XIX-A-16-aa 128. d.
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turned into a scandal, firstly because the Libyan side refused to take delivery of the goods two months later (when tensions eased) and secondly because the Hungarian side supplied military equipment, some of which was rightly objectionable.59 However, the rapprochement between the two countries was not so disturbed by the incident that in February 1978 the TKV and the Libyan Armed Forces Command signed a new arms-supply contract.60
The profitability of the production of military enterprises has also been continuously monitored since the early 1970s. Thanks to a wide range of subsidies, which were also used by civilian companies under other headings, the military enterprises of the KGM were able to show a steady profit. Vehicle, small arms and ammunition manufacturers made the lowest profit as a percentage of assets, while fine mechanical and communications companies made a profit of around 20% at the beginning of the decade.61 By the mid-1970s, the largest defence companies were matching the average for the machinery industry in terms of profitability, a picture that was no longer shaded by the nature of the product they produced, but also by whether they exported to the rouble or dollar market.62
The changing management environment showed that risk mispricing and excessive borrowing could lead to near-bankruptcy situations. In the case of the only Hungarian gun factory, it was not a lack of orders but, on the contrary, over-commitment that led to the company's financial collapse. The crisis at Diósgyőri Gépgyár (DIGÉP) was caused by a combination of poor management decisions, rigged international agreements and price problems. Against the advice of the technical managers, Diósgyőr undertook the simultaneous production of two different types of weapon (Vasilek's automatic 82 mm gun-mortar and the cannon part of the Gvozdika's self-propelled howitzer) while keeping its main product (S-60 automatic anti-aircraft gun) in production in order to increase dollar revenues.63 There were a series of delays from the delivery of the documentation and then the start of production was delayed due to technological and organisational problems. Despite government subsidies for the export of the automatic mortar and later the cannon, the company was plunged into a debt crisis, and in 1978 it was only possible to rescue the enterprise through a series of bank concessions.64
The decade of the 1980s, despite the general economic difficulties, began on a promising note for military communications companies with the most serious R&D backgrounds.In July 1980, the Mechanical Laboratory Experimental Company (Mechlabor for short) won a contract for a dollar order of unprecedented size. A contract worth USD 13.4 million was signed with the Indian Army - for the sale of the self-developed 'Forest' codename radio
59 A TKV 1977. évi líbiai eladásával kapcsolatos reklamáció. MOL, XIX-G-3-p 111. d. A TKV egyebek mellett 1950-es években gyártott lőszereket és 1946-ban gyártott lövegeket szállított az arab félnek, nem egészen kifogástalan állapotban. 60 A HB 1/288/1978. sz. határozata. 1978. február 16. HL HB iratok 7. d. 61 Az 1970. évi eredmények alapján a haditechnikai tevékenység hatásának értékelése a fontosabb haditechnikai termékeket kibocsátó vállalatok gazdasági helyzetére. 1971. június. MNL OL XIX-F-6-v 104. d. 62 Jelentés a Hadiipari Kormánybizottság részére a hadiipari termékek gazdaságossági, árképzési és szakosodási kérdéseinek vizsgálatáról. 1976. január. MNL OL XIX-F-6-ae 33. d. 63 Javaslat vállalati állásfoglalásra. 1973. augusztus 21. MNL OL XXIX-F-202-f 70. d.; illetve 82 mm-es Vasziljok automata aknavető gyártására történő felkészülés. 1975. augusztus 21. MNL OL XIX-A-16-aa 125. d. 64 A HB 3/272/1976. sz. határozata. 1976. október 21. MNL OL XIX-A-16-aa 129. d.; a Diósgyőri Gépgyár haditechnikai termelésének problémáiról. 1977. november 10. Uo. 131. d.; Feljegyzés Borbándi János részére. 1978. június 13. MNL OL XIX-A-98 128. d.
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jamming system, 'Inda' codename radio detection and interception station and 'Pine' codename radio detection and interception station. Mechlabor's main cooperation partners were FMV, the Broadcasting Technology Company, Labor Instrumentation Works and the Telecommunications Research Institute. The total value of the deal was $33.7 million.65
These businesses are already well signalled by the changing needs of customers. Libya, for example, was not only interested in full communications systems, but also wanted to buy complex military services and facilities. All this created a major challenge for Hungarian industry and the military, but also a huge export opportunity and hard currency inflow. By the summer of 1980, the reported order book for Libya was already in the region of USD 3 billion.66 The contract for the supply of radio detection and jamming systems was finally signed with Libya on 15 July 1981: a more modest contract, but still worth USD 297 million. The division of labour was as follows: the systems were manufactured and supplied by industry; a unit of the Hungarian People's Army's 2nd Group Headquarters (practically the military intelligence) provided assistance in the application and operation of the systems and training of personnel; and the conditions of operation (repair and maintenance) were provided by Industrialexport, also a Hungarian company. On the industrial side, the responsibility for the jamming subsystems was assumed by the Fine Mechanical Company, the reconnaissance subsystems by Mechlabor, and the communication subsystems and computer management subsystems by Videoton Electronics Company.67
The huge order from Libya, and the development and production of systems to be supplied to Iraq, India and Yugoslavia, as well as to the Warsaw Pact partner countries, have triggered a series of changes in both the military and the communications industry. The large-scale export of radio detection and jamming systems led to a significant increase in the tasks of advising, consulting and control, and the establishment of the Directorate of Electronics of the Hungarian People's Army, alongside the 2nd Group Headquarters. During the following years, the Directorate of Electronics was involved in the formulation of technical requirements, the definition of development directions, in the control of production, in the assistance of the developer in the production, in the final inspection, in the handover to the customer and in the training of the operating and repair personnel.68 As a result of these efforts, deliveries to India started in 1981 and, with some minor hiccups, contracts with other developing countries were fulfilled.
Relations with traditional Arab partners continued to expand in the 1980s. Hungary sought to help Iraq, which was at war, through industrial cooperation and participation in the construction of military-industrial facilities. For this purpose, a Hungarian-Iraqi joint committee was set up in early 1982 to coordinate military technical and military equipment assistance, and Hungary expressed its readiness to supply additional military materiel. On 22
65 Tájékoztató az indiai szerződésekről. 1980. október 13. Budapest Fővárosi Levéltár (BFL) XXIX. 220/a TÜK 13. d. See details Germuska 2008b. 66 Előterjesztés az Operatív Tárcaközi Bizottság részére: líbiai arab-magyar vállalat katonai létesítmények építésére elnevezésű közös rt. alapítása. 1980. november 25. MOL, XIX-F-6-mmm 46. d. 67 Jelentés A Videoton Elektronikai Vállalatnál a nem rubel export relációban teljesítésre kerülő zavaró-felderítő rendszerek gyártásának, értékesítésének helyzetéről. 1984. június 14. MNL OL XXIX-F-209-d 94. d. 68 Népi ellenőri jelentés a Videoton Elektronikai Vállalatnál folytatott ellenőrzésről. 1984. augusztus 28. MNL OL XXIX-F-209-d 94. d.
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March, a long-term military cooperation agreement was signed.69 In August 1982, a supply contract worth USD 57.4 million was signed for 1983-84: gas masks, radio detection equipment and jamming stations were purchased by Iraq.70 Under the earlier agreement, Libya was supplied with a battalion each of reconnaissance and jamming equipment in 1985 and 1986. Quantitative delivery took place in good time, but technical delivery (and thus apparently commissioning) was delayed by two years due to various objections by the buyer.71
In the second half of the 1980s, communications technology companies sought to maintain their expansion in a disadvantaged domestic environment by stepping up their R&D activities and by undertaking extensive market research in Asia. Mechlabor's developments enabled it to win a new tender in India in 1987-88 with its cooperation partners. In 1987, Mechlabor also set up an Electronics Marketing Cooperation with TKV and the Directorate of Electronics to promote the company's special products at various trade fairs in order to improve market research.72
Thus, scientific research, experimental development and production were intertwined in an unprecedented way, and the Directorate of Electronics of the Ministry of Defence provided know-how and complex services to customers. Contracts with Yugoslavia, Iraq and then India and Libya generated tens of millions of dollars in revenue, but the companies were still only able to meet their deliveries with a high proportion of Western imports: on average, 18-25% of parts came from outside the bloc, but for some devices it was not uncommon to see 70-80% (even with the embargo!).
The driving force behind the expansion of military production was thus clearly the expansion of the external market, including sales to the Third World: the share of exports in total military sales exceeded 60% after 1975 and 70% after 1981. In the context of this spectacular growth, it is also worth noting that the hunger for dollars also gave rise to phenomena that were in principle alien to socialist economics, such as the state approved commission for intermediaries, the 'extraordinary expenditures' mentioned in the introduction. From April 1968, a special directive of the Minister of Foreign Trade laid down how “extraordinary expenses of a confidential nature incurred in non-socialist relations” were to be authorised and paid. .73 The no. 11/1968. (top secret) decree gave also an exact definition of confidential extraordinary expenditures in 1. §: “Confidential extraordinary expenditure (briefly: extraordinary expenditure) [is the following]: all kind of pecuniary covenant with regard of signing contracts, acquisition of new markets or commercial quotas, broadening circulation of commodities, which is paid – directly or indirectly – to a foreign partner, and what is not a conventional expenditure in relation to circulation of commodities (discount, commission, propaganda or presentation cost etc.)”. The executional order was detailed in 4 pages in this decree. Although the official name of the corruption amounts was “confidential extraordinary expenditure”, in the daily praxis it was simply called “constitutional expenditure(s)”. The submissions of the enterprises were collected in dossiers under the
69 A HB 4/330/1982. sz. határozata – A magyar–iraki hadiipari együttműködési vegyes bizottság létrehozása. 1982. január 30.; a HB 4/332/1982. sz. határozata. 1982. április 23. HL HB iratok 9. d. 70 A HB 2/336/1982. sz. határozata. 1982. augusztus 30. HL HB iratok 9. d. 71 Jelentés a Mechanikai Laboratórium Vállalat átfogó felügyeleti ellenőrzéséről. 1989. október. BFL XXIX 220/a TÜK 14. d. 72 Ibid. 73 A külkereskedelmi miniszter 11/1968. számú utasítása. 1968. április 14. MOL XIX-G-3-c 39. d.
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cover name “constitutional expenditures”, they can be found in the correspondence of the enterprises and the Ministry of Foreign Trade.74 In 1979 the ministerial decree was reissued again and it explicitly used the term “constitutional expenditure”: no. 112/1979. special decree on the modification of the classification of the bank transfer orders concerning the confidential extraordinary expenditures (constitutional expenditures).75
This regulation means no less than that the market economy and the planned economy existed as parallel realities for Hungarian companies in the 1970s and 1980s. The Hungarian arms trading company TKV had a huge showroom built at its headquarters in Budapest, in which all the freely available products of the Hungarian military industry were presented. Visitors from outside the socialist bloc could choose from a store of small arms, military equipment and communications devices that could be ordered or even delivered immediately. TKV compiled a three-volume catalogue of the Hungarian companies' offerings – in English and French, and for some products (such as the S-60 AA gun) in Arabic, Spanish and Russian. As we have seen, the foreign trade company used intermediaries and brokers in various countries to promote business, and the manufacturing companies also made efforts to favour prospective buyers. If the urgency of the business required it, the Hungarian People's Army stocks were used to meet the customer's needs, the government only stipulating the time within which the People's Army stocks had to be replenished. Hungarian military enterprises often had to compete fiercely for large dollar orders, competing not only with other socialist countries but also with large Western military concerns (as in the case of the Indian Army). Those companies that succeeded were those that had a strong R&D presence in both civilian and military fields and followed international trends.
Conclusions
In this study, we have followed the changes in the life of military enterprises from the most rigid command economy to the late socialist semi-market economy. These companies had to operate under more stringent conditions than civilian enterprises, but the basic managerial tasks were little different - thus giving credence to Peter Almquist's statement quoted in the motto. The real dividing line was not between civilian and military firms, but between the different industries: while the explosives industry could not succeed in a given constellation, the communications and instrumentation sector, with significant Western technology imports, was able to develop and export a world-class product. The importance of the wider defence and industrial policy environment, and the global market conjuncture, shows that the acquisition of any advanced technology alone did not guarantee success. A striking example is the case of the TNT plant purchased from Bofors-Chematur for USD 4 million, which was built by the Swedish company in 1980-82, but due to a poor assessment of export opportunities, the TNT plant of North Hungarian Chemical Works only used 10-15% of its capacity. Thus, the plant had to be closed in 1988.76 By the end of the 1950s, Hungarian industry had thrown off the Soviet shackles and developed a model that was viable in the long term, meeting the demands of the army and the interests of the national economy.
74 See formerly classified documents of the Ministry of Foreign Trade between 1970 and 1979: MNL OL XIX-G-3-p, box no. 5 (1970), 16 (1971), 25 (1972), 34 (1973), 64 (1975), 98 (1978), 109 (1979). 75 MNL OL XIX-G-3-p 109. d. 76 Germuska 2009b: 55–56.
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Appendix
Table 1. Maintenance of fixed military industrial capacities of NIM and KGM enterprises paid out by the State between 1968 and 1975 in HUF million. Source: Germuska 2014, 434.
Ministry Type of subsidy
1968 1969 1970 1971 1972 1973 1974 1975 Total
KGM
Partial use of capacities
52 51 52 66 66 81 106 94 568
Out-of-use capacities
8 9 8 9 8 9 11 11 73
NIM
Partial use of capacities
85 65 95 97 128 128 129 130 857
Out-of-use capacities
8 6 12 14 12 12 11 12 87
In total 153 131 167 186 214 230 257 247 1 585
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Table 2. Distribution by purpose of state subsidies paid to enterprises engaged in military production between 1968 and 1975, in HUF million. Source: Germuska 2014, 441. KGM = Ministry of Metallurgy and Mechanical Engineering, NIM = Ministry of Heavy Industry, HM = Ministry of Defence
Type of subsidy Ministry 1968 1969 1970 1971 1972 1973 1974 1975 Total
Working Capital Supplement
KGM – – – – 202 228 205 152 787
NIM – – – – – – – – –
HM – – – – 25 35 60
Product development, experimental
research
KGM 64 42 62 70 41 13 27 94 413
NIM 1 1 1 1 1 2 5 12
HM – – – – – – – – –
Military industry wage supplement
KGM – – – 25 42 50 54 63 234
NIM – – – – – – 2 2 4
HM – – – – 3 3 4 3 13
Other military industry costs
KGM – – – – – – 26 16 42
NIM – – – – – – – – –
HM – – – – – – – – –
In total 65 43 63 96 314 331 323 330 1 564
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Table 3. The value of all Hungarian military technology exports between 1968 and 1972 and of which the value of subsidised exports. Source: Germuska 2014, 438.
1968 1969 1970 1971 1972 Total /
avarage
Total value of exports (million HUF)
1 407 1 447 1 802 2 109 2 502 9 267
Of which value of subsidised exports (HUF million)
594 429 493 211 161 1 888
Subsidised export share (%) 42,2 29,7 27,3 10,0 6,5 23,1
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