How Obama Impacts the Security IndustryBy John Honovich, Published on Nov 04, 2008
The security bubble is burst. With the election of Obama, US demand for security products will drop significantly as subsidies for security technology are reduced and global tensions are eased. This will place significant pressure on businesses to justify the real ROI of security technology and it will contribute to falling industry growth.
Here is the forecast:
- Expect many, if not most, US government projects in development to be put on hold until February 2009 (after the inauguration).
- Expect 2009 US spending on government related security technology to drop by 10% - 20% relative to 2008. This include direct military spending as well as homeland security and municipal projects funded by government grants.
- Expect overall US security demand to drop by 4% to 8% (given the large impact government has on overall security spending).
- Expect some reductions in global demand as other countries reduce their perceived need for anti-terrorism security measures.
The key drivers for this are:
- Obama will reduce spending on defense and accelerate withdrawal from foreign wars.
- Other countries, including those hostile to the US, will decrease their hostility as Obama reduces tensions relative to Bush.
- Obama will engage in public work projects but these projects will only have modest security needs and will likely not have an impact until 2010.
The report belows provide preliminary analysis. A copy of the final report, released later this month, will be emailed to newsletter subscribers only. You can sign up below if you are not already subscribed.
The Security Bubble is Burst
The US has been in a security bubble for the past 7 years. The response to 9/11 has generated $23 Billion USD in homeland security grant funding [link no longer available]. At least hundreds of millions spent on highly questionable security and defense projects. In the last few years, it has become clear that many of these projects are significant failures, like the US Mexico Border project [link no longer available] and the ongoing problems in the NYC project.
Fear and subsidies have driven so many poorly thought out and unnecessary projects. The need for companies and the government to demonstrate a response and the stream of federal subsidies has resulted in a bubble. It has increased the public's skepticism of these projects (e.g., cameras not working) and in my own analysis it was clear that these technologies had almost no effect on stopping terrorists or other real time threats.
Stock Market Movement Demonstrates This
While McCain's odds of winning the presidency plunged in the last month, so too have many security/defense stocks. Up until the last 30-45 days, these stocks have generally matched the pace of the S&P 500. Then, as McCain odds plunged from 37% to 9% (as shown by intrade) [link no longer available], these company stock's price have dropped 10% to 20% lower than the overall pace of the S&P 500. For instance, see L1, Northop, Smith & Wesson. Magal's another interesting example, up 45% for the year by the summer, Magal's stock suddenly plunged to -3% for the year in the last 45 days. (Note: thanks to "SecurityBear" for the idea for this test)
Given the correlation of McCain's odds falling and security/defense stock prices, I infer that investors believe Obama's presidency will significantly reduce the opportunities of these security/defense companies.
Decrease Spending and Subsidies on Security
Relative to the Bush administration, Obama will almost certainly decrease spending on defense and terrorism related security projects. We are already seeing the general recession impacting subsidies for security [link no longer available]. The deepening recession, by itself, will put pressure on reducing these grants/ subsidies. Obama's political positions and his Democratic base will accelerate those reductions as well as accelerating withdrawal from foreign wars.
These grants and military build-ups have been critical to the growth of security projects, not only for the US military (a very significant buyer) but also for states, local governments, utilities and transportation companies. All of these organizations have significantly used grants to justify security projects that would not have been feasible or justifiable otherwise. The drying up of these grants will cause significant reduction in the industry.
Decreased Hostilities and International Tensions
The demand for anti-terrorist solutions is driven by or at least enhanced by the level of tensions and opposition to the US government. While the Bush administration accelerated worldwide hostility to the US, the evidence is clear that the world dramatically prefers and is more comfortable with Obama.
The fear and the tension of the last few years is likely to subside by Obama's presence, his temperament and his international policies. Though this is certainly good for peace, greater stability and reduced risk decreases demand for security products.
Public Work Projects Minor Impact for Security Industry
It is likely that Obama will engage in significant public work projects yet those projects will have far less benefit to the security industry than the Bush administration.
Given the current plunge in consumer spending and its projected continuation, economic growth will be severely constrained. The textbook economic approach to such decreases is to compensate and offset this through increased government spending - e.g., the New Deal in the Great Depression. We are very likely to see a 'new' New Deal as hundreds of billions in new infrastructure projects will be approved in 2009.
However, the impact of those programs will take time and only have small elements for security. First such funding will not pass until Spring 2009 and it takes time to allocate such funding. Actual security projects may not commence until the first half of 2010. Plus, these are likely to be infrastructure projects that will certainly have a security component but a far smaller percentage than military and homeland security.
The recession and Obama's election combine to create a new world for the security industry - one where many are absolutely not prepared.
- Cut Waste - Anytime an industry grows for years based on stimulated governmental demand, waste accumulates. Extra people, inefficient processes, carelessness of planning. The waste needs to be cut immediately, especially for private sector companies where this could be the difference between surviving and going bankrupt.
- Focus on Tangible ROI - The industry has had it easy for years selling into the fear of terrorism and the easy money of government funding. As this tightens, everyone needs to make sure that their products and services truly solves day to day criminal and operational problems.