February 26, 2017    9 minute read

The Economics of Firearms

Aiming for Profits    February 26, 2017    9 minute read

The Economics of Firearms

 

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Firearms might originate from 13th century China, but the market has grown significantly since then and added some top players.

The global industry continues to see incredible profits even during recessions and uncertain times. It comes as no surprise that the US is the largest player in the global industry and also the world’s largest manufacturer and exporter.

Firearms are bought to supply armies all over the world, but also for the personal safety of individuals and for sport. The American market relies heavily on the country’s gun fever. Now that Donald Trump is Commander-in-Chief, the arms industry might be set to face some changes and challenges.

The country’s leader being a supporter of the Second Amendment is not really good for business – gun sales and gun producers thrive when the political leadership advocates gun controls. Everyone runs to the corner store and stocks up.

Heavy Hitters

Guns and ammunition are the biggest section of the arms industry with companies and governments spending billions every year.

The production worldwide is estimated by Small Arms Survey to be stationed somewhere between 36 and 46 million units per day, with more than one thousand companies producing weapons in around 100 countries. SIPRI estimates that between 2010 and 2014, the global volume of gun trading increased 16% as compared to the 2005-2009 period.

From 2011 to 2015, the US is the biggest exporter of firearms by far, accounting for 33% of all international sales, with Russia in second place.

China is the third biggest player. The Asian superpower rapidly climbed the ranks and went from being an importer to being a manufacturer and power exporter in just a few years.

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The Business of War

Many argue that war is profitable for countries like the US or Russia, even if there is no direct military involvement.

The Obama administration was relentlessly criticised by the Human Rights Watch (HRW) for supplying the Saudis with the military weaponry that they have been using in Yemen War, and that ended up killing many civilians. Saudi Arabia represented 7% of all imports and is the world’s second largest importer, after India. The Gulf country is the US’s biggest weapon buyer and lately the American Government’s biggest client.

4000 civilians were killed in Yemen by US-made weaponry since 2015

According to the UN’s High Commissioner for Human Rights, between March 2015 and November of last year, more than 4000 civilians were killed by US-made weaponry, and more than 7000 were badly wounded. The US Government condemned the multiple attacks but always refused to change its military support for Saudi Arabia. This aid amounts to more than $115bn in weapons sales since 2009, the year Obama took office for his first term.

The US has been widely known for its military spending, of which a large part consists of firearms. In fact, the North American country had, in 2015, a budget of $597bn for defence purposes, according to the World Military Balance report, published by the International Institute for Strategic Studies. This amount is larger than the following 11 countries on the list combined – China, Saudi Arabia, UK, Russia, India, France, Japan, Germany, South Korea, Brazil and Australia.

$597bn was the US’s 2015 defence budget

Missing the Target

Americans have had a long-lasting relationship with firearms, and over the last few years, the American firearms and ammunition manufacturers have prospered and contributed greatly to the country’s economy. However, there has also been controversy related to the gun issue.

According to an investigation by Mother Jones, there have been 85 mass shootings in American soil since 1982, with 1353 casualties, including 685 dead. In 69 a weapon (or several weapons) bought legally were used. Even more troublesome is the fact that 15 of these attacks happened in schools. There is also an average of 10,000 kids younger than 18 years old who are killed by firearms every year.

85 mass shootings took place in the US since 1982

Of course, the gun industry has tried its best to distance itself from the shootings, and several campaigns were launched to prevent the deadly use of weapons. Last month, for example, the industry teamed up with a suicide prevention group in Las Vegas to promote prevention.

In fact, a report by Vox reveals that 1.5 million people in the US died after being shot by a firearm since the Vietnam War. The report shows that more people are killed by guns than by AIDS, drugs and terrorist attacks all combined.

Whenever there is a mass shooting, gun advocates are usually wary of imposing restrictions. After the Orlando nightclub shooting, where 49 people died or the one at Virginia Tech University, where 32 lost their lives, there was always debate about implementing gun-free zones in certain areas.

Yet, gun advocates usually argue that people would become easy targets if gun-free zones are implemented, and one of the main mantras of the industry lobbyists is that guns don’t kill people, people kill people. In spite of the criticism, the American domestic firearms industry not only survived Obama’s presidency, but it also exceeded all expectations analysts had for their annual revenues.

The American Dream

It’s no surprise that President Obama kept pushing for more and more gun control. After all, more Americans were killed by firearms during his time as President than in the First World War. His approach to gun restrictions and his will to impose gun control made Americans run to the closest shop to arm themselves, which led to a massive growth in weapon sales.

 

The local industry grew so much in the past two years that it created 21,000 new well-paying jobs, according to the National Shooting Sports Foundation (NSSF). It also generated $49.3bn in economic activity, according to data from NSSF, which estimates that gun manufacturing companies and their employees pay a staggering total of $6.2bn in taxes.

$49.3bn in economic activity were generated by the US weapon industry

In fact, Obama’s stance against the gun industry after violent shootings is said to have given a $9bn boost in the industry since he was elected in 2009, according to the Washington Post.

However, Obama is no longer President, and Trump doesn’t share Obama’s views on gun restrictions, which might affect the American manufacturers and cap their earnings.

When Trump Is Bad for Business

Trump had the endorsement of the National Rifle Association but, ironically, the sales of guns and ammunition have been plunging simultaneously with the share price of American gun manufacturers like Smith & Wesson and Sturm Ruger.

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Since Trump was elected, the two biggest gun companies in the US have seen their share price fall more than 20%. Also, the amount of FBI background checks for people who want to buy firearms went down 20% in January after having plunged 16% in December.

According to the Bureau of Alcohol, Tobacco, Firearms and Explosives, the manufacturing of weapons more than doubled while Obama was the helm of the nation. So, with Trump in the White House, there is less incentive for people to arm themselves.

This leads the firearm companies to adopt new tactics if they want to keep the sales up. Focusing on ammunition is a strategy some of the smaller manufacturers are adopting. Ammo is something that will always be needed, even more than firearms. Some of them are also shifting their target to collectors, who don’t necessarily buy weapons for necessity. Another possibility would be to direct gun sales to female customers and produce new guns that they could use for their personal protection.

With Trump in charge, gun lovers feel they can take more time to decide whether or not to buy a new gun. They are more likely to buy accessories.

Just for Sports

Gun manufacturers will most likely take advantage of the growing business of sports (or competition) shooting. With the Federal US Government restricting access to land for hunting, gun owners are turning to sports shooting. Consumers end up gathering in groups and going for these competitions where there is money to be spent.

The industry is also preparing for another opportunity that could land big bucks. If the Republicans in the Senate pass the Reciprocity Act 2017, it would allow gun owners to legally carry a concealed weapon in any state. This represents a huge opportunity to invest in designing new accessories for these users.

As it will probably be easier for the gun lobbyists to pass laws than it was during Obama’s administration, they will continue to have the opposition of states like California, where gun restrictions and regulations continue to be extremely strong.

However, while the industry might not have the same off-the-chart profits it had with Obama, Trump brings stability to the business, and the manufacturers can focus on what their clientele wants. The next few months should give an indication of how the firearms industry will react to Trump’s policies. Will the share prices recover? It should soon be clear.

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