Industry Trends: Guns & Ammunition and Tanks & Armored Vehicle Manufacturing

TankAs seen in the Society of Manufacturing Engineering (SME) Yearbook

Guns & Ammunition Manufacturing

The Guns and Ammunition Manufacturing industry has undergone explosive growth during the past five years, with revenue anticipated to grow at an annualized rate of 8.4% to $14.7 billion by 2013. One reason for this growth is the increased responsibilities of federal, state and local departments to include the prevention of terrorist attacks and response preparedness. Along with increased responsibilities, these agencies also received greater funding, some of which was parlayed into gun and ammunition purchases. For example, in 2009 and 2010, law enforcement agencies received additional funding from the stimulus package. However, the situation is expected to reverse in 2013. Because of the sequester, federal funding for the Guns and Ammunition Manufacturing industry will dry up and budgetary constraints will resurface.

Guns & Ammo Rev

While most Americans cut back on their purchases of cars, clothing and other luxuries during the recession, purchases of firearms and ammunition are expected to grow rapidly in the years leading up to 2013. Although gun and ammunition sales rates are driven by a number of factors, the recent spike is mainly attributable to fears regarding the possibility of tougher gun-control legislation from the Obama administration. The situation has been exacerbated by recent mass shootings, such as the Sandy Hook Elementary School shootings, which increased the visibility of gun control talks, making potential legislation a greater possibility. In December 2012, the Obama administration announced its intention to reform gun laws to prevent a similar tragedy from happening again. Consequently, consumers have started purchasing firearms and ammunition at record rates. The number of FBI National Instant Criminal Background Checks (NICS) is currently at an all-time high, which is indicative of mounting consumer interest in gun ownership. Between 2007 and 2012 the number of background checks rose at an annualized rate of 11.9%, and during the first three months of 2013, the number of background checks skyrocketed 44.5% compared with the same period in 2012. Because consumers generate about 60.0% of industry revenue, the demand they generate is critical to the industry’s success.

Trading Bullets

Exports generate about 35.2% of the Guns and Ammunition Manufacturing industry’s revenue. Although government demand for industry products is expected to subside in the five years to 2013 due to budget cuts, exports are anticipated to grow at an average annual rate of 9.8% during the period because of mounting global demand. This robust growth is forecast to continue during the five years to 2018, allowing the United States to remain a net exporter of guns and ammunition. This anticipated growth will provide relief, which will counter receding government demand.

Domestic consumers, on the other hand, have increasingly turned to imports to satisfy their rapidly growing demand for guns and ammunition. With demand for industry products surging during the past five years, domestic manufacturers have struggled to keep up. Consequently, during the five years to 2013, imports are expected to grow at an annualized rate of 9.3% to $3.9 billion. The industry gets a large portion of its firearm imports from Austria and Italy, due to the popularity of the Glock and Beretta brands, respectively. However, Germany and the United Kingdom are the most popular sources of imports of ammunition and ordnance products.

Future Challenges

The Guns and Ammunition Manufacturing industry’s trajectory during the five years to 2018 will largely depend on the United States’ involvement in foreign conflicts and consumer perception regarding the future of firearms legislation. While revenue is estimated to surge during the five years to 2013, it is forecast to move more in line with historical growth rates during the next five years, increasing at an annualized rate of 4.5% to $18.4 billion by 2018.

The effects of the Budget Control Act of 2011 will further lower government spending domestically and abroad, which will continue to dampen downstream demand in coming years. Federal, state and local law enforcement agencies are also projected to cut back on spending as stimulus funding dries up and budgetary constraints return. Military spending abroad is forecast to decline in the five-year period as well. On the other hand, the threat of terrorism will likely persist for years to come, resulting in continued funding of federal, state and local law enforcement to expand terrorism prevention and response capabilities.

After record growth in civilian small arms and ammunition sales during the past few years, demand is expected to moderate in coming years. As the economy continues to recover, fears regarding increased crime and concerns about changes to gun laws will begin to subside, causing this segment’s uncharacteristically fast growth rate to slow to a more reasonable rate. Nevertheless, the civilian market will slowly continue to drive sales in light of reduced government spending in this industry.

Tanks and Armored Vehicle Manufacturers

Since 2002, demand for the Tank and Armored Vehicle Manufacturing industry has been volatile. Between 2002 and 2009, the wars in Iraq and Afghanistan supported strong demand for tanks and armored vehicles. According to the Department of Defense, funding for on-ground vehicles increased at an annualized rate of 78.8% during the period, largely due to increased spending on mine-resistant, ambush-protected vehicles (MRAPs). In 2010, however, revenue fell 22.8% as the US military decreased its exposure in several conflict zones. Sequestration is expected to accelerate this industry’s revenue losses as automatic budget cuts decrease defense spending. Because the US military accounts for about 68.0% of industry revenue, the effects of the sequestration and the decline of the US military’s involvement in global conflicts will decrease demand for industry products. As such, IBISWorld expects revenue to fall at an annualized rate of 12.1% in the five years to 2013.

Tank Revenue

Shift in Preference

The wars in Afghanistan and Iraq have changed the needs of the modern military. Replacements, improvements and upgrades are constantly being engineered as feedback regarding functionality is received from the battlefield. In the future, the US Army will shift its focus away from heavily armored mechanized vehicles to the Ground Combat Vehicle (GCV). For example, the US military will develop programs that target lightweight, quick-response vehicles, rather than tanks, because they concentrate on mobility and fast deployment. As such, defense spending will move toward new products that integrate the GCV program, which is another contributing factor to the industry’s declining revenue.

For example, General Dynamics’ M1 Abrams battle tank, which is the primary main battle tank of the US Army and the Marine Corps, weighs nearly 68 tons, making it one of the heaviest tanks currently in service. General Dynamics generates revenue from the M1 because existing tanks are maintained and upgraded to the M1A2 version. An M1A3 version is currently being developed; however, during the five years to 2013, the DoD started investing more money into lightweight, quick-response vehicles that can undertake a greater variety of tasks. Investments like these will change the industry’s landscape during the next five years.

Looking Ahead

Taking a deeper look into General Dynamic’s financial data offers insight into the industry’s strategy with sequestration in effect. IBISWorld expects General Dynamics, the industry’s largest player, to post $7.5 billion in revenue in 2013, accounting for about 74.0% of the market. In wake of the budget cuts, the company has yet to experience significant declines in revenue. This is because the company is focusing on its service segment, rather than its product segment, which will adversely affect industry revenue.

Tanks and armored vehicles are typically produced during a long period of time due to the high costs of research and development, and production. Consequently, it is generally more cost effective to update or modify an existing platform than to create a new one. Kits are also made to update vehicles that have been in service for an extended period of time, so sustainment and support services also generate a significant amount of revenue. To this end, fiscal austerity will deter demand for new, expensive tanks and armored vehicles, in favor of repairing and upgrading existing vehicles.

Because of the sequestration, industry participants will increasingly look for alternative ways to grow revenue. Industry participants are expected to focus on markets abroad as operators look to international customers to offset declining demand from the US military. The industry will increasingly rely on US allies such as Egypt, Israel, Canada, and the United Kingdom to purchase US military vehicles. As domestic demand decreases, IBISWorld anticipates exports to account for 22.5% of revenue in 2018, up from 19.0% in 2013.

Effects of Sequestration

Sequestration is expected to have a profound effect on industries that are heavily reliant on US defense spending. To this end, industries that are dependent on the US government for revenue, such as aerospace, will look to private investors to stay afloat; however, not all defense-related industries will encounter setbacks.

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