Survival of the Fittest

After the subprime mortgage, Fannie Mae and Freddie Mac crises in the United States, fears of credit crunch and hard landing seem to have swept the world over. looks into how these financial issues might have affected or will affect the security business.

The U.S. Federal Reserve (FED) lowered interest rates in 2001 to stem economic and financial crises after Sept. 11th. The move attracted investors to invest in real estate en masse, leading to a boom in housing construction as borrowers with low incomes and bad credits were encouraged to sign subprime mortgage agreements with high default rates.

Unfortunately, starting from 2006, house prices decreased dramatically which in turn made refinancing more and more difficult, resulting in the painfully felt credit crunch. "Many defaulted and their houses were acquired by lenders, who tried to sell these houses in a hurry to pay their debts to government-backed banks like Fannie Mae and Freddie Mac," Kilic continued. "House prices went down further, causing the housing bubble to burst. And the subprime crisis emerged."

In the beginning, most economists thought that the crisis was a local problem within the United States. "Ripple effects in the international arena soon appeared with the Northern Rock bank run. Bank of China then had one of its biggest drops as the bank was holding almost US$9.7 billion of securities backed by U.S. subprime loans," Kilic recounted. Now the crisis goes global.

North America
"Declines in new construction sites, high levels of house inventories and the degradation of subprime markets will continue to adversely affect the U.S. residential security market for the near future," said Tom Brigham, President of Brigham Scully Public Relations.

"However, the security industry is not a typical industry," Brigham clarified. For instance, government controlled entities, from transportation hubs and schools to military bases and embassies, will continue to add security systems to protect staff and attendees.

"It's often claimed that security is a recession-proof business. Security may be, but security products certainly are not," cautioned John Honovich, President of "The subprime meltdown is clearly evolving into a general debt crisis where accessing capital will become significantly harder for everyone."

Since security products are capital expenditures and capital is tightening, organizations are going to find it more painful to purchase new security products. "Just the talk of a downturn is enough to trigger a more conservative approach to budgeting," said Adam Stroud, Director of Sales and Marketing for Paxton Access. "Identifying a budget for installing and/or expanding security systems will be challenged fully by management during tougher economic times, by the question of the system's return on investment (ROI)," said Dave Tynan, Vice President of Global Sales at Canada-based Avigilon.

"Essentially, the recession will motivate companies to delay purchases and keep their existing systems for a few more years," Honovich predicted. This will have a severe impact on the security business, with possibly many security companies going out of business.

Europe and the Middle East
The strength of the Euro, at a record high versus the dollar, is becoming a problem for Europe's exporters. The International Monetary Fund (IMF) already lowered its 2008 GDP growth forecasts for Britain and Germany: from 1.75 percent to 1.4 percent and from 2 percent to 1.5 percent, respectively. "Our main concern as a European manufacturer is the weakening U.S. dollar," said Fabrizio Colciago, CEO of Italy-based Cieffe (a March Networks company). With around 70 percent of its revenue coming from abroad, the increasingly strong Euro has put a brake to Cieffe's otherwise healthy growth. "We are hoping for a more stable American economy."

In the Middle East, rising labor and material costs have made products more expensive to end users, said Itamar Yaar, CEO of Yaar Strategic Consultancy & Management. "The weak dollar works against us as most of our expenses are paid in Shekels while we used to price our systems in dollars," said Almog Aley-Raz, cofounder and CEO of Israel-based PerSay, also facing Colciago's conundrum. "We have moved to Euros (outside the United States) in order to compensate for this."

According to Archana Rao, Senior Research Analyst at Frost & Sullivan (EMEA), there are two possible outcomes as to how security will be affected. "The first is a mild recession causing a slowdown in the economy, slowdown in the construction sector and mild rise in unemployment which are expected to slow down the growth of the security market." A more serious impact on low-end segments will be witnessed, whereas high-end segments such as banking and corporate will still maintain or increase their security investments to maximize their ROI.

"The other possible scenario is a major recession," said Rao, "which causes business shutdowns, an increase in unemployment, total collapse in the housing sector and drastic reduction in security budgets, thereby posing significant challenges to all segments."

 "Demand will go down slightly, but effects on electronic security will be minimal and short-term," Yaar predicted. On July 21st, the British Olympic Delivery Authority began the process of inviting expression of interest for its command and perimeter security system (CPSS). The total investment in security in connection with the 2012 London Games started out with an initial budget of $400 million and has now spiraled to more than $2 billion.

The U.S. economic slump is definitely having an effect on the Southeast Asian economies, David Rees, Regional Manager, APAC, Salto Systems, believes. "There seems to be a slowdown in many of the region's countries." Singapore might be the only exception as high-end office and residential buildings are currently at record prices. "However, this may turn very quickly if the global share markets continue to weaken or experience a sharp drop in the near future," warned Stewart Yen, CEO of Secom Singapore. "When the economy is bad, the first thing people try to save on is security, especially in Singapore where it is generally perceived to be a safe city."

In India, the local economy is more integrated with the global one than ever before, said Yash Kansal, Senior Commercial Specialist, U.S. Commercial Service (Delhi, India). "The slump in the United States is severely impacting the Indian manufacturing and services market where companies are experiencing a dip in their profits, with the Sensex dropping by 40 percent in the last two to three months." With increasing inflation and interest rates, consumer spending is reducing, further impacting the demand for goods and services. "As businesses aim to cut costs to remain competitive, spending on budget heads such as security equipment is being deferred," Kansal observed.

China is not faring much better, either. Recent surveys done by China indicate that the financial and economic crises have cast a shadow over the minds of many Chinese manufacturers and exporters, who are worrying about delayed payments and projects. Whether China will be able to escape the fate of a post-Olympics "economic hangover" remains to be seen.

"Corporate and high-end users will probably not be affected as much, as their security systems have other value-added functions like monitoring productivity and improving efficiency," said Sarangan. People who deploy security equipment solely for security purposes, on the other hand, will treat security as a cost and are more likely cut it when there might be cash flow problems.

"Thatˇs why we are counseling our clients to sell the 'payback' side of security systems and show how they increase profits and ROIs," Brigham suggested. Businesses should be asking: Will additional investments reduce the amount of investigation time, or improve response time so that investigations are conducted more effectively? "If we assume that short response time equals greater percentage of successful investigations, then there's improved ROI," illustrated Tynan. "Only higher performing systems will meet the needs of organizations during an economic downturn."

The government's Freddie Mac and Fannie Mae rescue plan should be a good sign, Brigham reassured. "It sends a signal to investors worldwide that the U.S. government is prepared to take all necessary steps to prevent the credit troubles from engulfing financial markets and further weakening the economy and housing markets."

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