POLAND: COOPERATIVES VENTURES WITH WESTERN FIRMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050014-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 14
• Publication Date: February 1, 1973
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Poland: Cooperative Ventures with Western Fire: c
Confidential
ER IM 73-16
February 1973
Copy No. tf t~
a~
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1973
INTELLIGENCE MEMORANDUM
POLAND: COOPERATIVE VENTURES
WITH WESTERN FIRMS
1. Poland hLs become increasingly interested in cooperative ventures
with Western firms in the past two years. This memorandum details the
agreements entered into and examines the possible economic gains for
Poland and the potential interest for US and other Western firms.
2. Cooperative arrangements with Western firms offer Poland a
relatively safe and easy way of drawing closer to, and becoming more
competitive in, the world market. Poland under Gierek has become
increasingly active in seeking such ties. About half of the more than 55
known cooperative agreements, and nearly all of the larger deals, have been
signed since he took power at the end of 1970. In the 1970s, most of
the payoff from joint ventures will go to the domestic economy in the
form of new, higher quality goods and, in some industries, greater efficiency.
Over the longer run, exports certainly will benefit from the direct business
created by cooperative arrangements and from the new skills and contacts
gained from expanding ties with the West. These arrangements, however,
will not do much to improve industrial organization and management or
to stimulate research and development.
Note: This memorandum was prepared by the Office of Economic
Research.
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3. The leadership is especially interested in production sharing
venturesl in such engineering industries as the motor vehicle, construction
equipment, and machine tool branches, which play an important part in
plans for expanding industrial output and improving the standard of living.
Production sharing deals range from simple agreements involving Polish
production or assembly of components to major purchases of Western
industrial plant, plus long-term technical help, with partial repayment it
kind from the output. A distinguishing feature of these arrangements is
the provision for interaction on a continuing basis between the Western
and Polish enterprises. Poland has also looked to cooperative deals in other
fields, including marketing, tourism, and transportation, to increase its hard
currency earnings while acquiring new equipment and skills. Of the total
number of known agreements, 24 involve production sharing, eight provide
for joint marketing, 20 involve cooperative ventures in third countries, and
three relate to tourism.
4. Many of the Western firms involved are internationally known
and have been -involved in the East European market for years. France leads
in the number of contracts signed, followed by West Germany, the United
Kingdom, Sweden, Italy, the United States, Austria, and Japan. These
countries are also the major trading partners of Poland in the industrial
West.
5. Production sharing deals have accounted for most of Polish export
earnings so far from cooperative ventures. Although earnings are still small,
amounting to only US $15 million to $20 million in ! 971, they have grown
rapidly and represent about one-fifth of total Polish sales of machinery
and equipment to the industrial West. Scattered data on individual
agreements suggest that earnings wi;l continue to rise, as the Poles expect.
Under one of the larger deals (with SMT of Sweden, covering machine; tools),
Polish deliveries are to total $20 million during 1971-76.
6. Poland has only recently entered into cooperation agreements
with US firms. In 1972, production sharing agreements with the Koehring
International Corporation and International Harvester and a franchise and
technical agxement with Intercontinental Hotels were signed. US firms,
having little tested interest in the Polish market, hesitate to negotiate such
1. Production sharing is an arrangement which involves manufacturing or assembly as an integral
part of the venture. The term co-production is applied to the more complex and comprehensive
of these arrangements. These typically entail the provision of capital and entrepreneurship by ti..:
Western partner and the supply of plant, labor, and raw materials by the Polish. Such ventures
often acquire Western markets for the joint product. Poland retains nominal ownership of the venture.
Less comprehensive agreements require one of the partners to provide component parts for a product
or to perform preliminary operations on a product which is then shipped to the other partner
for finishing and sale.
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agreements with Poland because of the headaches to be faced in dealing
with the slow-moving bureaucracy. They are also reluctant to risk their
reputation, technology, and markets. Lack of control over production seems
to deter US firms even more than it does West European competitors.
Nevertheless, more US firms doubtless will become involved, if only in the
hope of improving their chances subsequently to sell equipment c' regular
commercial terms.
7. The size and importance of Polish cooperative ventures could
increase if Poland adopts an attractive law permitting direct foreign
investment. Polish leaders reportedly would like to have such a law to allow
Western firms to invest in projects under the 1976-80 economic plan. A
further impetus to cooperative investment would be realized if Western
governments pass legislation guaranteeing investment in Poland against
political risks.
8. Poland wants production sharing agreements with Western firms
in order to expand production of new types of machinery and equipment
for export and for the domestic economy. Other deals involving transport
and tourism clearly are of secondary interest to the leadership. Among the
most rapidly growing industries in the economy are the machinery
industries. The Poles believe that these industries must play a growing part
in exports to the West if trade with that area is to continue to expand
rapidly in the last half of the 1970s and beyond.
9. Polish efforts since the mid-1960s to promote sales of machinery
and equipment to the industrial West have met with some success. Machinery
sales in 1971 were about three and one-half times the 1967 level, but they
are still quite small, accounting for less than 10% of total exports to the
area in 1971. Sales of ships skyrocketed in 1971 and accounted for nearly
all of the doubling of exports of machinery to the industrial West in that
year. The present level of orders for Polish ships indicates that they will
continue as an important machinery export.
10. The Poles attribute the low share of machinery sales to Western
prejudice and tariffs and to their own inertia and ignorance of the market.
To help overcom,_ these obstacles, they are counting heavily on production
sharing and other forms of cooperation. The Polish leadership is looking
to the long run - immediate trade prospects are fairly good and
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balance-of-payments problems are not urgent - and they are looking as
much to the indirect as to the direct benefit of cooperation. Over a decade,
the gains from new customer attitudes, new skills, new contacts, and new
reputation - reinforced by discreet economic reform - could do more for
Polish exports than the business directly generated by cooperative deals.
11. Production sharing deals also reflect changing domestic priorities.
The regime has been increasingly anxious to improve the lot of consumers
since the December 1970 riots that put Gierek in power. The initial reaction
to the riots was to boost worker morale by increasing pay and meat supplies.
No less urgent in the longer term, although much harder and slower to
fulfill, is the need to put more consumer durables on the market, particularly
automobiles; to modernize the transport system; and to begin making up
the large arrears in construction of hou:;ing, shops, schools, and hospitals
while at the same time realizing continued gains in industrial capacity. It
is for these reasons that Poland has centered its attention on deals to expand
output of motor vehicles and construction equipment.
Development of Production Sharing and Other Cooperative Ventures
12. In the past two years, Poland has stepped up tremendously the
pace of establishing production sharing ventures. More than one-half of the
24 known agreements Poland has entered into since 1964 have been signed
since 1970, including all of the larger arrangements.2 Poland is now on
a par with Romania in the number of agreements concluded, but still lags
behind Hungary and Yugoslavia, the front runners in Eastern Europe. At
least six agreements also have been signed on cooperation in machine tools.
The largest such deal is that with SMT of Sweden, which calls for a two-way
turnover of $30 million during 1971-76.
13. Nearly all of Poland's recent production sharing ventures involve
the machinery sectors, primarily the motor vehicle, construction equipment,
and machine tool industries. The most important in terms of value are the
1971 arrangement with Fiat that covers the production of a new car, the
Fiat 126, and the 1972 deal with Berliet that covers the production of
buses. At least six cooperative deals have been concluded in the construction
equipment area, two of them with the US firms Koehring International
and International Harvester.3
2. The author of a recent article in the Polish press claims that Poland now has about 200
"co-production" agreements with the West. Apparently he is including not only all "production
sharing" agreements as defined in this memorandum, but also arrangements with Western firms on
cooperation in third countries and many straight licensing deals. The Poles probably have more
"co-production" arrangements with the West than the 24 production sharing ventures and the 20
ventures covering cooperation in third countries cited in this memorandum, but it is doubtful that
the total number of agreements comes anywhere near 200 or even half that number.
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14. The major Western countries involved in production sharing
ventures with Poland are France, West Germany, the United Kingdom,
Sweden, the United States, Japan, Italy, and Austria.4 In most cases the
Western partner firm has provided the capital equipment, technology, and
entrepreneurship, whereas Poland has supplied the plant, labor, and raw
materials. Poland, however, has sold several licenses to Western firms. The
Polish Befama textile machinery works, for example, has signed a long-term
production sharing agreement with Ateliers Fernand Goreux of Belgium
under which Befama will deliver the technical documentation and 70% of
the parts for the production of textile machinery assembled in Belgium.
15. In addition to the 24 production sharing ventures inside the
country, Poland is known to have entered into 20 agreements involving
cooperation i-1 third countries, eight joint marketing arrangements, and three
arrangements relating to tourism (see Appendixes B through D). Poland
also has concluded a number of miscellaneous cooperative arrangements such
as the 10-year technical assistance agreement with Clark Equipment A.G.,
an overseas subsidiary of Clark Equipment Company of Michigan, and a
joint shipping venture with Australia. Under the 1972 arrangement with
Clark, the Polish Stalowa Wola combine is to receive documentation,
technical assistance, and pro.:uction rights for the manufacture of axles for
heavy construction equipment and vehicles. The Polish foreign trade
enterprise Bumar is to handle sales in Eastern Europe, and Clark
International is to take care of sales in the rest of the world. The shipping
venture with Australia was concluded in July 1972 after nine months of
negotiations. The joint company, which is registered in Sydney, consists
of the Polish shipbrokering and chartering company Polfracht and the
Australian Woolgrowers and General Traders Pty., Ltd.
16. Poland also has cooper.ted with the West in the exchange of
technological know-how. In September 1972, for example, Ministry of
Transport specialists discussed with Italian roadbuilding enterprises the
possible participation of Italian experts in highway panning. Prior to this,
Polish experts had traded their experience in the use c,?f building materials
for Italian documentation on planning and building h ghways.
17. Although Poland so far has allowed joint ownership only in
companies located outside of Poland,5 future arrangements of domestically
4. Many Western firms also are involved in other production sharing of straight contract deals
in Eastern Europe. Fiat, for example, was already entrenched in Poland under a 1966 contract
as well as in the USSR, Bulgaria, Hungary, and Yugoslavia. Steyr-Daimler-Puch has several agreements
with Hungary on cooperation in production of buses and agricultural machinery. Berliet has an
agreement with Hungary on cooperation in bus production. Prior to the signing of n production
sharing agreement, the West German firm of Wewag acted as sales representative in Germany for
the Polish foreign trade enterprise Metalexport.
5. Polfracht and the Australian Woolgrowers and General Traders Pty., Ltd., for example, share
equally in the initial capital of the joint shipping company.
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based ownership may be in the cards. A foreign investment law ?r.'ould have
been unthinkable under Gomulka, but under Gierek a much more positive
and pragamatic approach exists. Poland has recently begun work on a foreign
investment law in order not to be left out in any competition for Western
capital. Romania, Hungary, and Yugoslavia have already enacted such laws.
Poland may also be expecting balance-of-payments strains that might
eventually develop if the use of Western, credit continues at its present rapid
rate. A foreign investment law would permit Poland to acquire at least
some Western equipment without adding immediately to the
balance-of-payments deficit. At present, however, Poland has little reason
foi' concern over its debt position. Poland's relatively low ratio of debt
service to exports of 20% - among the lowest in Eastern Europe - and
its relatively strong economy and low dependence on Western imports place
it in the most favorable economic position relative to the West oI any East
European country.
Gains to the Domestic Economy
18. Gains from production sharing arrangements with the West are
difficult to mea ure because so many of the agreements are still in the
initial stages. It appears, however, that at least the automotive and
construction equipment industries - long given low priority -- will benefit
greatly from these ventures. Most of the benefits will accrue directly to
production ra*.her than to the state of Polish teLhnology.
19. The cooperativ; venture with Fiat was signed in accordance with
Gierek's promise to provide the population an hiexpensive small car, the
Fiat 126. Annual production is to begin at 3,000 in 1973 and is to reach
150,000 by 1979. The leaders hope to boost the number of automobiles
per 1,000 inhabitants from 15 in 1970 to 25 in 1975.
20. The deal with Berlict of France resulted from a decision made
several years ago to build up the bus industry. Berliet is to assist in the
modernization of the Jelcz Motor Vehicle Plant, which the Poles hope to
turn into one of the major bus producers in Europe. The capacity of the
plant eventually will expand to 5,000 buses annually, of which 1,700 will
be produced under the Berliet license. Assembly of buses began in December
1972. By 1975, more than one-half of the parts are to be made in Poland.
21. The production sharing ventures with Jones Cranes, Cole Cranes,
Stetter, Steyr-Daimler-Puck, Koehring, and International Harvester and the
technical assistance agreement with Clark should help improve
mechanization of the Polish construction industry, which is at a lower level
than in most other East European countries. These agreements provide for
cooperation in the production of heavy-duty cranes, concrete mixers, trucks
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for construction sites, hydraulic building machinery, heavy tractors and
crawlers, and axles for construction equipment and vehicles.
Gains to Exports
22. Poland is exploring four main avenues to generate exports from
cooperation deals ?- production sharing agreements. agreements set up
expressly for marketing Polish goods in the West, arrangements providing
for sales to third cou:ltries, and ventures 'o develop Polish tourist facilities
and earnings. Poland's desire to expand exports - especially those to hard
currency areas - by means of cooperative ventures has so far me*. with
only limited success.6
23. The Poles claim that exports to the West based on production
sharing agreements amounted to $10 million in 1970 and $15 million to
$20 million in 1971.7 This represents less than 2% of total exports to the
industrial West in 1971 and about one-fifth of the exports of machinery
and equipment. Agreements signed in the last two years, however, should
add considerably to Poland's exports. Plans call for deliveries under
production sharing agreements to rise to $25 million in 1972 and to "several
score" million dollars by 1975. Out of deliveries of co-produced goods in
1971, 41% reportedly went to West Germany, and about 10% each to
Sweden, the United Kingdom, and Italy.8 Poland hopes to boost sales of
machinery produced under production sharing agreements to Sweden alone
from about $2 million in 1971 to $22 million by 1980.
6. Poland also has signed several compensation deals which are not considered in the text, because
they do not involve long-term cooperation in producing or selling a particular line of goods or
services For example, a $135 million credit extended by Francl in 1969 for the purchases of French
license-, aria equipment for the electronics, engineering, and steel industries is to be repaid with
Poush del.veries of machint.ry and equipment and of copper. At the time of the extension of a
$100 million credit by Japan in 1972, a separate but apparently interdependent agreement was
signed whereby Japan would take 2 million to 3 million metric tons of Polish coking coal annually
for 10 years. When the contract for a nylon plant from Mitsui of Japan was signed in 1971, a
concurrent agreement was drawn up whereby Mitsui would buy machinery in Poland. These deals,
although more important than most of the cooperative arrangements, are not production sharing
ventLrr;s and apparently are not considered by the Poles in calculating export earnings from
production sharing ventures.
7. These figures may include exports generated by agreements under which Poland delivers to
the licensing firm in the West goods produced under that firm's license. Among such agreements
are those with Monark-Crescent (outboard motors) and MacGregor (hatch covers) of Sweden; Leyland
(crankshafts) and Napier, Ltd. (turbocompressors) of the United Kingdom; and the 1966 deal with
Fiat of Italy. Poland apparently also includes under its earnings such deliveries as those of spare
parts to Volvo as part payment for 77 Volvo trucks.
8. The article from which this breakdown was obtained also claims that 16% of the 1971 deliveries
under production sharing went to Switzerland. An earlier Polish article, however, stated that as
of the end of 1970 cooperation deliveries to Switzerland were minimal. There are no indications
that this situation changed significantly in 1971.
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24. Only piecemeal information is available linking specific exports
to specific production sharing deals. Exports of furniture parts to IKEA
of Sweden probably came to at least $1 million in 1971, and deliveries
of digitally controlled machine tools under the agreement with the Swedish
state owned firm SMT are scheduled to average $3.3 million a year during
1971-76 - exports of all types of machine tools to the West totaled only
$6 million in 1970. An agreement of August 1971 with the West German
firm Stetter stipulated that the Polish enterprise Stalowa Wola would deliver
mobile concrete mixers worth $5 million over a three-year period. Polish
deliveries to the United Kingdom under the 1966 agreement with Jones
Cra:,e:s were to total about $7 million over a seven-year period. Polish
deliveries to Italy under the 1971 Fiat deal could eventually reach an
estimated average of $10 million a year, and it is expected that deliveries
of bus parts under the Berliet deal will constitute a major share of machinery
exported to France. In a case where Poland is supplying the know-how,
the Befama textile machinery works expects earnings from Goreux of
Belgium to rise to about $3 million in 1973.
25. At least eight joint ventures have been established in Western
markets for selling Polish goods in the West and, in some cases, Western
goods in Poland hese ventures will provide Polish
exporters with experience in Western marketing practices, but the success
of these ventures in increasing Polish hard currency exports is difficult to
assess, as Western firms might substitute products marketed by the joint
company for those that would otherwise be purchased from Poland. For
example, a Western company that entered into an agreement with Poland
for marketing machinery might replace part or all of the machinery normally
purchased from Poland with machinery imported under the cooperative
marketing venture.
26. The sales volume of Polish machine tools by a French partner -
Metalex-France - in a joint marketing venture is known to have increased
from 7 million francs in 1969 to 20 million francs in 1971. This company
also sells other Polish goods in France, including equipment for the chemical,
mining, and construction industries. Metalex-France, established in 1966,
represents several Polish foreign trade enterprises on the French market.
The company now also represents large French firms in Poland through
a technical office set up in Warsaw.
27. Poland has been able to expind somewhat exports of machinery
to other Communist countries and to less developed Western countries by
joining forces with developed countries in projects such as those with Ensa
and Krebs of France for the construction of soda factories in Libya and
Turkey. By working closely with Western firms in such deals, Poland also
gains some technological and managerial know-how.
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28. The development of tourism could yield considerable foreign
exchange earnings without as much investment or risk as is entailed in
production sharing agreements. Also. Western firms may find such ventures
more attractive than production sharing ventures because of the greater
assurance of a return on this investment in hard currency. Although the
Poles have not yet developed tourist-related agreements to any great extent
25X1 they would like to become more active in this area.
Toward this en , representatives of the Polish tourist enterprise Orbis visited
France in June 1972 to discuss the possible construction of five small hotels
in Poland. The deal, if concluded, would include purchases by the French
firm of Polish hotel supplies.
29. Joint ventures with US firms or their subsidiaries have only
recently gained some importance. In the past nine months, Poland has signed
production sharing agreements with the Koehring International Corporation
and International Harvester. It has also signed a 10-year technical assistance
agreement with Clark Equipment A.G. All three of these agreements involve
cooperation in construction equipment. In addition, Poland has signed a
franchise and technical agreement with Intercontinental Hotels, a subsidiary
of Pan American Airways, for a hotel to be built in Warsaw.
30. US firms hesitate to get involved in production sharing
arrangements with Poland for much the same reasons as West European
firms. Joint ventures suffer from the usual difficulties of trading with
Poland: the slow decision-making process which often results in long and
costly negotiations, the inability to deal directly with Polish enterprises,
and Poland's increasing insistence on barter deals. Certainly the example
of the Berliet deal - which took five years to close - is not heartening
to US firms. Moreover, Western firms inhibit joint ventures by their concern
to protect their reputation, technology, and markets.
31. The lack of control over the management and production process
in a joint venture with Poland seems to bother domestic US firms even
more than it does West European firms. US firms also are confronted with
some problems not faced by West European businesses. There is still public
opposition to buying Communist goods, and the aversion of US dockworkers
to handling Communist goods remains a threat. US firms also are facet
with the difficulties of conducting, from a great distance, such supervision
and control as the Poles permit. While none of these disadvantages is
insuperable, together they may well discourage many US firms from
becoming involved in joint production arrangements with Poland. On the
other hand, those US firms that look beyond the drawbacks may find the
access to cheap and plentiful labor and already extant plant capacity enough
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to entic them into cooperation deals. If nothing else, the willingness to
conclude joint venture agreements may serve as an opening wedge for the
generally more desirable straight contract deals.
32. In any case, government-level efforts to form production sharing
and other cooperative arrangements probably will continue on both sides.
Mutual interest in cooperation is expressed in the US-Polish agreement on
economic, industrial, and technological cooperation signed in November
1972. This agreement states in a general way mutual "readiness to develop
all forms of industrial and technological cooperation." In addition to joint
production of machinery, Poland has expressed interest in obtaining help
in developing its raw material base, notably copper, sulfur, coal, oil, and
natural gas. In May 1972, Poland discussed with Standard Oil of Indiana
the possibility of a cooperative venture to explore for oil and natural gas
deposits in Poland. US firms might find cooperation in raw material
development preferable to that in more advanced areas of production
because repayment in Polish raw materials would be much more desirable
than in Polish manufactures. Similarly, US firms might prefer tourist-:elated
arrangements to production sharing deals because the former offer better
assurance of repayment and less risk.
33. The Poles are blocked to a large extent in their attempts to expand
production sharing arrangements by their cumbersome decision- making
apparatus, by the disinterest and leariness of their industrial enterprises,
and also by Western hesitatio.f to get involved in such ventures. The Polish
leaders are attempting to streamline the foreign trade apparatus in order
to facilitate the conclusion of cooperation agreements and normal trade
contracts, but they have a long way to go in reducing the red tape to
a workable level. Moreover, as long as main plan directives are handed down
from the top, the freedom of individual Polish enterprises will be severely
limited, and there is no indication that the Poles intend to relinquish a
high degree of central control.
34. Still, Poland remains highly interested in joint ventures, and,
indeed, fo!.lowinr, the lead of Yugoslavia, Romania, and Hungary, is
considering legislation to permit ownership by foreign firms in Polish
enterprises. Presumably the Poles will permit Western firms to participate
only up to the 49% permitted by Yugoslavia, Romania, and Hungary. The
law reportedly will be passed in time to allow Westerners to invest in projects
under the 1976-80 plan. if Western countries were to pass legislation
guaranteeing investment in Eastern Europe against political. risk, Western
firms might be more willing to invest. The United States has already
extended coverage under the Overseas Private Investment Corporation
rr i~T
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(OPIC) to Yugoslavia and Romania. The United States also is considering
the extension of coverage to other East European countries. Japan has the
facilities to guarantee investment to Communist countries against political
risk but has not yet used them. West Germany has actually granted such
guarantees on investment to Yugoslavia.
35. Although Western firms will remain skeptical, many firms will
continue to be interested in exploring joint ventures with Poland. Western
firms increasingly realize that agreements which generate Polish exports are
the best way to assure the winning of a contract. In fact, Poland has stated
that Western countries must consider deals involving payment in goods if
they wish to increase exports. Also, Western firms recognize that joint
venture agreements probably are a good means for attracting further Polish
business - the Poles tend to go back to the same firms whether or not
they can get the best deal from them.
36. Poland probably will continue to enter r''' cooperative ventures
at least at the same rate as in the past two years. An investment law might
help pick up the tempo if it provides for sufficient controls by Western
firms over production processes and for guarantees on repatriation of capital
and profits. It should be noted, however, that Romania has signed only
two agreements providing for joint ownership inside the country since
passage in March 1971 of the decree permitting foreign investment.
Furthermore, Yugoslavia attracted only $52 million worth of Western
investment during the first three and one-half years after the passage in
July 1967 of a regulation permitting foreign capital investment it Yugoslav
enterprises. Amendments in January 1971 to waive reinvestment
rec,,iirements together with steps to clarify the foreign investor's right to
repatriate all initial capital probably have been largely responsible for the
increased rate of investment since then. A total of around $90 million in
foreign capital was engaged as of late 1972. Very likely the Poles will
encounter similar difficulties in breaking the ice even if they do pass an
attractive law. And, like the Hungarians, and probably the Roma-nians as
well, they may be reluctant to admit large amounts of foreign capital when
actually confronted with the possibility of doing so.
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