BUSINESSWEEK ONLINE : AUGUST 16, 1999 ISSUE
COVER STORY

Gunmakers Under Fire
Gun-control legislation. Litigation. An angry public. Gunmakers are feeling the heat. A close-up look at the secretive industry

A 44-year-old day trader in Atlanta snaps and murders 12 people. A pair of teenagers barge into Columbine High School in Littleton, Colo., and gun down 12 fellow students and a teacher. In rural Arkansas, a 13-year-old and an 11-year-old assemble a collection of 10 fire-arms and kill five at an elementary school.

With each new massacre, America's outrage about gun violence flames higher. A Harris Poll conducted on June 10 and 15 showed that 73% of Americans now favor tougher handgun controls. Hoping to capitalize on this passion, Democratic Presidential hopeful Bill Bradley is demanding government registration of every handgun--a proposal that, to many firearms owners, raises the specter of an outright ban. Meanwhile, Chicago, Detroit, and more than 20 other cities have filed lawsuits blaming the firearms industry for the staggering toll of urban handgun violence and are seeking hundreds of millions of dollars in damages.

At the center of this hurricane are the world's gun manufacturers, a diverse group ranging from true-blue American brand names like Smith & Wesson and Colt's Manufacturing to foreigners like Italy's nearly 500-year-old Beretta to idiosyncratic tiny players like W.S. Daniel, a company in Ducktown, Tenn., that makes mail-order assault-weapon kits. They're all dependent on America as the world's largest consumer firearms market--and they're all running scared and increasingly divided on how best to defend themselves. ''I've been in this industry 36 years, and this is the most awesome set of circumstances I've ever seen,'' says Robert G. Morrison, chief operating officer of Miami-based Taurus International Manufacturing Inc., the U.S. arm of Brazilian handgun producer Forjas Taurus.

Not since George Washington established the Springfield (Mass.) Armory to defend the young republic has the American gun industry faced a more serious crisis. Trouble looms on every front. Politically, the companies are facing the prospect of a Big Tobacco-like meltdown of their power in Washington and clout with state legislatures, a development that could lead to tough new regulations that aren't riddled with loopholes. While handgun registration is still unlikely, measures that would make it harder for criminals to buy weapons at gun shows and limit the number of firearms purchased at one time seem more viable every day.

Legally, gunmakers are facing an onslaught of lawsuits they can barely afford to fight, much less lose. These cases are based on the controversial theory that manufacturers are partially responsible for gun violence. The suits seek millions to cover local government expenses for health care and policing. That's a scary prospect to many gun executives because the business is financially shaky. While 1999 will be a strong year, thanks in part to fears of new restrictions on ownership, most executives expect the market to steadily shrink over the long term.

EAST-WEST SPLIT. Together, these problems could threaten the survival of some companies, says Andrew Molchan, director of the National Association of Federally Licensed Firearms Dealers. If some lawsuits go against the industry, many of the major producers ''will be forced to operate under bankruptcy-court protection,'' Molchan predicts.

The intense financial pressure bearing down on gunmakers could have a ripple effect far beyond the secretive, comparatively small $1.5 billion firearms business. Fearing for their survival, a breakaway group of bigger, more established companies is starting to show a willingness to compromise with the industry's many adversaries. Located largely in ''Gun Valley,'' the swath of Connecticut and Massachusetts where the American firearms business was forged, this group includes Smith & Wesson, Colt's, and Mossberg, among others. Also in this camp are some foreign-owned manufacturers such as Glock, an Austrian company with U.S. headquarters in Atlanta.

While these companies are still passionate in their belief that Americans have a constitutional right to bear arms, they are beginning to drop their traditional hard-line opposition to any new form of regulation. A few executives, for example, are stepping out front and saying they would agree to tougher background checks at gun shows. ''I, for one, would be very much interested in discussing fundamental changes'' in the gun business, says Alan I. Mossberg, chief executive of Mossberg Corp. in North Haven, Conn., the nation's second-largest producer of shotguns. ''When guns get into the wrong hands, it doesn't help the industry.''

Words such as these are heresy to many smaller manufacturers--not to mention the politically formidable National Rifle Assn., led by actor Charlton Heston. ''I don't think it's in [the manufacturers'] best interests to negotiate. When the tobacco companies talked about settlement, they begat more lawsuits,'' says James Baker, the NRA's chief lobbyist. These views are widely echoed in the other major center of the U.S. gun business, Southern California. Headquarters of several small manufacturers of cheap Saturday night specials, such as Lorcin Engineering, Davis Industries, and Bryco Arms, the West Coast wing of the industry tends to oppose any concessions at all (page 67).

Many foreign makers, such as Beretta and Forjas Tauras, are also taking a hard line. And given that imports account for about 30% of U.S. handgun sales, including key contracts with the U.S. military and many police departments, their views count. ''At this point, we plan to settle this by winning these lawsuits,'' says Jeff Reh, general counsel and vice-general manager of Beretta USA Corp. in Accokeek, Md.

BIG YEAR. Because nearly all of the major manufacturers are privately held and shrouded in secrecy, little is publicly known about their revenues, profits, lobbying, or other inner workings. But for at least a decade, the domestic firearms market, while highly cyclical, has been in a slow retreat, largely because of a decline in hunting. U.S. gun production peaked at 5.7 million guns in 1980; it averaged around 4 million units annually between 1995 and 1997, the most recent years for which federal data are available. ''We are a very mature industry, and we are all fighting for a very finite amount of business,'' says Mossberg.

Despite its small size, the gun market is fiercely competitive. In 1997, Smith & Wesson, the leading handgun producer, grabbed just 19% of the handgun business. The next 10 largest domestic producers split up 36% of the market--leaving a healthy 45% for imports and more than 40 other small producers. Such a crowded field means margins are narrow and profits modest. Sturm, Ruger & Co., the only producer publicly listed in the U.S., earned just $23 million on sales of $212 million last year--and some of that stemmed from its $67 million nongun businesses. And Ruger, believe it or not, is considered among the most profitable. Colt's, which sank into bankruptcy in 1994, had profits of about $6 million on sales of $96 million last year. ''This is not a business you want to get into if you want to make a lot of money,'' warns Elizabeth Saunders, owner and president of American Derringer Corp., a small Waco (Tex.) producer of handguns.

Ironically, 1999 is shaping up as a gangbuster year. The surge is being driven by prospects of harsher gun control and by concerns that Y2K will prompt a massive societal breakdown. Problem is, once many of these customers have acquired their weapons, they aren't likely to come back soon. Indeed, the recent history of the gun business has been a roller coaster, with peaks driven by fears of gun control. The last high-water mark, in 1993-94, is attributed to President Clinton's gun-control efforts. But that was followed by three straight years of decline in which production plunged over 30%. ''Next year will be a disaster,'' predicts former industry lobbyist Richard J. Feldman, who expects sales to drop by at least a third.

NEW EQUALIZERS. Because of these gloomy prospects, the industry is desperately reaching out for new markets. It has heavily promoted cowboy action shooting, in which participants dress up in rodeo costumes and reenact scenes from the Wild West, replete with gunfire. It is also trying to sell more weapons to women. One of the pioneers was Derringer's Saunders, who in 1989 introduced the Lady Derringer, the first handgun designed for a woman. With such touches as a synthetic ivory handle and a burgundy case, it became an overnight sensation and spurred development of the Lady Colt and Lady Beretta. Overall, women now account for about 25% of the gun market. Based on the theory that more people would buy guns if there were less danger of children accidentally misfiring them, Colt's is also speeding ahead with development of so-called smart guns, which can only be fired by the owner.

Other companies are looking outside the gun market. Southport (Conn.)-based Ruger, for example, in 1994 diversified into making titanium golf club heads. Smith & Wesson has opened stores in Springfield, Mass., and elsewhere to sell its line of clothing. Still other companies are trying to get out of the business altogether. ''It's no secret what's for sale,'' says one industry executive. ''Everything.'' But until the industry's political and legal woes ease up, no one is going to want in. ''Who would buy one of these businesses if you don't know your continuing liability?'' says one New York investment banker.

How far will the legal and regulatory attack on the industry go? At this point it's hard to tell. In the past, the political clout of the NRA's 2.9 million members has always ensured that most federal gun regulations are shot through with loopholes. Manufacturers have managed to sidestep the 1994 assault-weapons ban, for example, by making minor design modifications on their weapons.

Now, Congress is working on gun-control measures again--but their outcome is far from clear. Senate and House lawmakers began meeting the first week of August to hammer out differences between their bills. The final measure, expected in the fall, likely will include criminal-background checks for purchasers at gun shows and flea markets and require that vendors verify their identities to gun-show promoters. Congress also will call on the Federal Trade Commission to study whether gun marketing illegally targets youngsters.

A much bigger threat to the industry comes from the 2000 Presidential race, in which Vice-President Al Gore and former Senator Bill Bradley have made gun control a key plank in their Democratic campaign platforms. Gore has responded to Bradley's sweeping proposal, calling for nationwide gun licensing, limiting gun purchases to one a month, and making trigger locks mandatory. Risking the key suburban swing vote, Bush has largely adopted the NRA line, supporting instant background checks for gun shows and stricter enforcement of existing laws (page 68).

The outcome of the lawsuits filed by cities is also hard to handicap. The cases are based on the innovative legal theory that the gunmakers are somehow responsible when a third party uses their product to maim or kill. How so? By allegedly distributing guns to people who the companies should know are likely to use them for criminal purposes. This argument is, at best, problematic. For starters, the gunmakers point out that most of them sell strictly to distributors and so don't come into contact with rogue dealers. But even assuming that wasn't the case, the manufacturers are still only suppliers. They don't pull the trigger. Thus, they argue, they can't be held legally liable for any shooting deaths.

Still, the legal pressure on the industry intensified last February when a federal jury in Brooklyn, N.Y., in Hamilton vs. Accu-tek found 15 gun manufacturers responsible for negligent distribution. True, only three companies--including Beretta and Taurus--were ordered to pay damages. But it was the first time a jury had ever held the industry responsible for distribution practices.

The case featured testimony from Robert Hass, a former vice-president for marketing at Smith & Wesson, who claimed executives could have stemmed the underground distribution of guns in cities. He testified that manufacturers could easily cut off retailers that repeatedly make multiple sales of guns or have many crime guns traced to them, ''in the same way a retailer would be cut off who broke price [agreements].'' U.S. District Judge Jack B. Weinstein agreed and didn't mince words about the industry's responsibility. Concluded Weinstein: ''It is the duty of manufacturers of a uniquely hazardous product, designed to kill and wound human beings, to take reasonable steps...at the point of sale to primary distributors'' to prevent their misuse.

The manufacturers are appealing the verdict. Ultimately, Harvard Law School Professor W. Kip Viscusi doesn't believe the law is on the plaintiffs' side. But Viscusi, who watched the tobacco litigation closely, warns that may not matter: ''If you get enough of these claims lodged against you, all you need is one jury getting mad at you.'' In today's environment, with mass shootings a regular affair, that hardly seems a stretch. And given gun-industry finances, even one award would be cause for panic.

NO LEADER. That's why gun companies may be willing to compromise over their own distribution practices. It would not cost them much to weather a crackdown on abuses. National Shooting Sports Foundation. President Robert T. Delfay figures criminal use of firearms accounts for ''far less than 1%'' of the guns and ammunition sold. Already, many favor beefing up the chronically underfunded Bureau of Alcohol, Tobacco & Firearms, which regulates gun sales. ''These [rogue] retailers ought to be prosecuted and closed down, in capital letters,'' says Delfay. ''If that means the ATF needs more help, we need to get them more help.'' The NSSF also strongly backs mandatory background checks at gun shows--another big loophole.

Still, given the gulf between the industry and its foes, any settlement will be a tough slog. For starters, the plaintiffs haven't yet coalesced enough to choose a leader with whom the companies can negotiate, if they were so inclined. And despite tentative overtures, ''it would be very difficult,'' says Delfay, vowing the industry ''absolutely will not agree to any financial settlement.'' Meanwhile, the NRA has already gotten 13 states to pass laws preempting local government suits and hopes to double the number next year.

The challenge of making peace with handgun-control advocates will be made more difficult by the deep split between the main-line companies and militant newcomers. The NSSF is dominated by the older companies, such as Smith & Wesson, Remington, and Mossberg, that have long stressed safety in sober marketing campaigns. But that image has been undercut by mavericks such as Miami-based Navegar, best known for its Tec-9 assault pistol, and W.S. Daniel, which offers Full Metal Jacket and Streetsweeper models, drawing howls from gun-control activists. Not only do these companies not belong to the NSSF, they have even been banned from showing some of their guns--and their provocative ads--at the NSSF's Shot Show in Atlanta, the world's largest gun trade fair.

Now, things are looking grim for the upstart makers of cheaper weapons. Since 1994, Navegar's production has plunged over 60%. In the same period, output at the Ring of Fire companies--including Lorcin, Davis, and Bryco--has dropped 75%, says Garen J. Wintemute, who has long studied them as director of the Violence Prevention Research Program at the University of California at Davis. California, meanwhile, is soon expected to approve tougher standards for guns made or sold in the state. The bill ''would outlaw most of the guns made by these companies,'' says Wintemute.

The future has never been more uncertain for America's oldest manufacturing industry. Feldman, the former industry lobbyist, figures it's now conceivable that ''the sale of handguns could be outlawed.'' Asked if he was worried about such a threat, Stephen Sanetti, Sturm Ruger's general counsel, concedes that this is a national ''cultural debate.'' Adds Sanetti, fatalistically: ''If the will of the people is to tighten up on gun laws, then so be it. If the law is changed, we will follow the law.'' It isn't the kind of defiant response you might expect from a gun executive. But it is a realistic admission that this business has lost much control over its future.

By William C. Symonds in Boston and Lorraine Woellert and Susan Garland in Washington, with bureau reports

To read a letter to the editor about this story, click here.

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