17 October 2004
The New York Times, October 17, 2004
By LOUIS UCHITELLE and JOHN MARKOFF
THE high-pitched whine started suddenly during breakfast in the elegant dining room of the Regency Hotel in Manhattan. Richard G. Hudak, a good-natured, talkative executive, ignored it at first, but the sound persisted. Clearly distracted, he broke off the conversation, rose from the table and walked slowly toward the lobby, tracking the source of the noise with the concentration of a hunting dog. No one else seated at the elaborately set tables in the crowded room seemed especially concerned.
The whine stopped as abruptly as it began, and when Mr. Hudak returned a minute or two later, he was his relaxed self again. An elevator had malfunctioned, setting off the alarm, he explained. The whine had not signaled a terrorist attack, which is Mr. Hudak's great concern as director of corporate safety and security for the Loews Corporation, the Regency's owner.
Before 9/11, retired cops did this sort of work, Mr. Hudak said, disdainfully. He, by contrast, is a specialist, a former F.B.I. agent and a Harvard graduate who is high enough in the Loews hierarchy to compete successfully for corporate funds to protect the company's many properties from terrorism. "Since 9/11, senior executives listen more closely and I have much more access to them,'' he said.
The 3M Corporation brought Mr. Hudak to a reporter's attention. Thanks to him, Loews has become a good customer for a 3M product: a paper-thin, puncture-proof film that is affixed to windows so they won't shatter when a terrorist bomb explodes, sending shards of glass flying into employees and customers. Believing that the Regency, particularly the ground floor, is a potential target, Mr. Hudak had the film installed on the restaurant's huge plate glass windows, at a cost of $8 a square foot.
The product's first test at the hotel came not from terrorists, but from a disgruntled employee who smashed a window with a hammer. "It broke but did not shatter,'' Mr. Hudak said. The shards stayed sandwiched between the two layers of film, as if they were part of a shatterproof auto windshield. "That demonstrated to management the value of applying window film,'' he said.
Four of the 20 hotels in the company's chain now have it. So do the windows of a two-story Bulova watch factory that Loews owns in Woodside, Queens, as well as the glass doors to the Loews executive offices in Manhattan. "It has become a recommended solution for a lot of situations, including labor unrest,'' Mr. Hudak added.
Corporate America is spending heavily for protection. Private-sector outlays for antiterrorism measures and to guard against other forms of violence may now be as much as $40 billion to $50 billion a year, or two or three times higher than the annual rate before 9/11, according to estimates compiled by CQ Homeland Security, a daily Internet newsletter published by Congressional Quarterly. The federal government's contribution has also passed the $40 billion mark, double what it was before 9/11. As the spending soars, domestic security seems poised to become a significant factor in the overall economy, much the way military spending was during the cold war.
THE question is: What is enough security?'' said Gordon Adams, who oversaw national security spending at the Office of Management and Budget in the Clinton administration and now heads a security policy studies program at George Washington University. "The answer is, no one knows, and fear is a powerful driver here. Since we do not know who means us harm, where they are and how long they are going to continue to mean us harm, where do you stop?''
Mr. Adams contends that much of the spending on domestic security is justified. Shattered glass is certainly a legitimate concern, he said, "but I predict that five years from now there will be Congressional hearings about the illegitimate business that is also being done, through the exploitation of fear.''
For now, such second-guessing is not even on the horizon. If anything, Senator John Kerry accuses President Bush of not spending enough on domestic security. "The measurement is not are we safer, the measurement is are we as safe as we ought to be,'' Mr. Kerry said in the presidential debate on Wednesday night. And his answer was no.
The marketplace for domestic security is developing apace. Mr. Hudak and his counterparts at more than 300 big corporations have banded together as members of the International Security Management Association. The group says the risk of terrorist attacks justifies more spending, and it is busy making that case to employers.
Consultants are entering the field, too. "We are telling companies to look at their earnings drivers and protect them from shock,'' said Mark J. Gerencser, a senior vice president at Booz Allen Hamilton, the global consulting firm.
And, of course, the sales forces of tens of dozens of companies, offering a huge array of security devices and services, are making their pitches. The products are promoted at domestic security trade conferences that are held almost every week in some American city.
The 3M Corporation, for one, has proved adept at stoking demand for its window film, called Scotchshield Ultra Safety and Security Window Film. "Since 9/11, we have seen a significant increase in the demand for bomb-blast mitigation, mainly for office buildings in the Northeast,'' said Jeffrey F. Bradley, the business manager for the consumer safety department at 3M that makes and markets Scotchshield.
The sales pitch developed by Mr. Bradley and his team has plenty of shock value. A reporter visiting the company's lab in St. Paul is given a crowbar and invited to break a pane of glass that is not protected and another that is. The first flies apart; the second does not.
Then Mr. Bradley's staff shows a video - the same one distributed to customers - of two bomb blasts at a test site. The video makes the point much more vividly. One blast is directed against a window without Scotchshield and the other against one with the product. The unprotected window shatters, sending glass shards flying with the force of bullets; the other shatters but stays in place.
In each case, the approaching waves from the explosion are seen from inside the soon-to-be destroyed window. In their presentations, 3M sales teams explain that terrorists have been known to set off a small blast first, and then, when office workers rush to the windows to see what is happening, a second, powerful blast is detonated - like the one depicted on the video - showering the workers with shards of glass.
That is what happened at the American embassy in Nairobi, Kenya, on Aug. 7, 1998, Mr. Bradley said. "I have seen a number quoted as high as 80 percent of injuries in an explosion coming from shattered glass,'' he said.
If protecting one's employees is not adequate incentive to buy such products, there is also the insurance lure. Congress mandated in 2002 that insurance companies offer businesses protection against liability and property loss from terrorism.
"Anything you do to mitigate a terrorist attack on your property has a favorable impact on the premiums,'' said Robert P. Hartwig, chief economist of the Insurance Information Institute. He estimated that premium payments for this coverage now totaled at least $10 billion a year. "You make the workplace environment safer," he said, "and at the same time you serve your own interest by reducing your insurance cost.''
Government spending on domestic security is also huge, and growing fast. Federal outlays reached $41 billion during the just-ended fiscal year, up from $33 billion in fiscal 2003 and $21 billion in the year that ended days after 9/11, according to the Congressional Budget Office. (Those figures do not include spending by the Department of Homeland Security on activities unrelated to fighting terrorism.)
There may be a lot more on the way. If Congress goes along with President Bush's budget proposals, the federal contribution will rise nearly 15 percent, to $47 billion, in the current fiscal year, and that on top of the more than $7 billion that state and local governments have added from their own pockets since 9/11 for more police and fire department protection, Census Bureau data show.
"The need for homeland security, given the terrorist threat, is like a transaction cost,'' said Douglas Holtz-Eakin, the director of the Congressional Budget Office. "So was the cold war spending. Anytime you have a transaction cost on a large-enough scale, you lower the return on productive investment and reduce to some extent economic performance. So as a nation, we have a clear incentive to keep the homeland security transaction cost as low as possible.''
As the overall cost approaches $100 billion, domestic security is beginning to take on the characteristics of military spending in the early years of the cold war. Just as an open-ended fear of Communism drove that spending surge, the open-ended terrorist threat is driving today's spending on domestic security.
The Communist scare came alive as China fell in 1949 and North Korea invaded South Korea the next year. Before long, military spending grew large enough to influence productivity and economic growth, often dragging down both. A dollar invested in a weapons system, many economists argue, does not have the multiplier effect of a dollar invested in automated machinery installed in factories to make trucks and computers, which in turn become tools for additional production.
Spending on domestic security has the potential to become a similar albatross for the economy, although it has not yet reached the proportions of the cold war era. By 1953, military outlays had risen to 14.2 percent of all economic activity from a post-World War II low of just 3.5 percent in 1948. Following a similar trajectory, but from a much smaller starting point, spending for domestic security has risen from well under half of 1 percent of gross domestic product just before 9/11 to roughly eight-tenths of 1 percent three years later. One percent, or $110 billion a year, is the point at which spending on domestic security would begin to affect the overall economy. And the nation is quickly getting there.
MARK ZANDI, chief economist at Economy.com, has developed a computer model of what would happen to the economy if spending on domestic security suddenly and miraculously went to zero next year. The initial impact would be negative. Removing the stimulus of the roughly $50 billion in government spending would shave a third of a percentage point off the annual growth rate of the economy, and the work force would be smaller by 140,000 jobs. But by 2006 or 2007, the economy would be better off, the model indicates.
"The redirection of government and business spending on domestic security to other types of investment and hiring generates greater gains in productivity and income growth,'' Mr. Zandi said. He noted that in the wake of the cold war, military spending fell to 3 percent of G.D.P. in the late 1990's from nearly twice that level in the late 1980's. "There was a tremendous peace dividend that helped to lift the productivity growth rate in the 1990's,'' Mr. Zandi said.
Bush administration officials point to spin-offs from spending on domestic security that are likely to offset some of the drag. The Internet, after all, started life as a Pentagon-financed research project, connecting military and academic laboratories. To cite another example, two leading high-tech companies, Sun Microsystems and Silicon Graphics, grew out of government funding in the 1980's that aimed to develop highly sophisticated computer workstations for scientists, designers and engineers.
Domestic security, however, may be a different animal. In the cold war, there were vast expenditures from public coffers for troops and weaponry to contain Communism and to prepare for an all-out nuclear war against a Soviet enemy. Domestic security is focused on a different mix of products and services, many of them still coming to market. The primary goal is to build global electronic networks that monitor the movements of cargo and people and thwart terrorists or keep them at arm's length.
The innovation required by all of this is showing up in Silicon Valley, although sorting out the spending on domestic security and computer security is difficult. "We are seeing a pretty healthy $12 billion annual market related to cybersecurity infrastructure,'' said Ted Schlein, a partner at Kleiner, Perkins, Caufield & Byers, the venture capital firm.
That is different from the situation during the cold war, when the government had a more dominant role. But if the private sector is more visible this time, the subsidies that flow from the government still shape the process, albeit on a much less noticeable scale. As Dr. Penrose Albright, assistant secretary for science and technology in the Department of Homeland Security, put it, "My job is to steer the existing structure to the needs of homeland security.''
For example, Northrop Grumman and BAE Systems, two military contractors, are developing a prototype electronic device, a shield of sorts, that can be mounted on commercial airliners to defend them against shoulder-fired missiles. The $100 million in development funds is coming from Washington, but Northrop and BAE are contributing technology of their own, and the airlines would presumably install the devices at their expense, ideally at a cost of less than $1 million a plane, Dr. Albright said.
IN a similar vein, the Unisys Corporation, among others, is developing a system for tracking the tens of thousands of steel freight containers that move every day across oceans toward major ports in the United States. Through the use of special sensors and seals, as well as a satellite network, the containers would be tracked along every foot of their journeys. Any attempt to tamper with one - perhaps to insert a dirty bomb in, say, Sri Lanka or Karachi - would be detected, in theory.
The tracking would give shippers - Wal-Mart Stores or Sara Lee, for example - the precise location of their inventories in transit and much more information about the arrival time. Here, then, is a system that the federal government is paying to develop and that Unisys is beginning to market as a commercial service.
"We have found that the average C.E.O. does not want to pay for a lot of security,'' Joseph W. McGrath, the president of Unisys, said in an interview. The people tracking these containers, however, are "supply-chain gurus, and the new tracking ability makes the ships carrying these containers floating warehouses,'' enhancing inventory control.
Thus does domestic security give birth to a commercial spin-off. But the marketplace may also require an intermediate step that most corporate executives long opposed but are now beginning to advocate: government regulation. Mr. McGrath, for one, says he favors more regulation. Most executives in the maritime industry do, too, he said, citing a recent survey of shipping executives that showed that 75 percent supported mandatory regulation.
From the maritime industry's point of view, a regulated security system is likely to speed up the movement of cargo through American ports, freeing ships more quickly for their next journey. Unisys and other companies would be authorized to operate tracking systems that adhere to a government standard. And the Wal-Marts of the world would have to sign up, even if they thought the costs outweighed the benefits.
The Department of Homeland Security, responding gingerly to the various sentiments involved, and on behalf of an administration ideologically opposed to regulation, has already issued some new rules. Twenty-four hours before a cargo container bound for the United States is loaded at a foreign port, the shipper must file a manifest electronically. The Customs Service, now an arm of the department, promulgated that requirement. It raises a shipper's costs, swelling national spending on domestic security - but it does so for everyone, so there is no competitive advantage.
"We have much better data now from these manifests about the content of shipments coming into the country, where the content is coming from and who touched it'' at the port of departure, said Elaine K. Dezenski, director of cargo and trade policy at the Department of Homeland Security.
THERE is another side to this coin: self-regulation. That is an approach that Alfonso Martinez-Fonts Jr. is pushing as a special assistant at the Department of Homeland Security in charge of reaching out to the private sector.
When the subject came up during an interview, he referred a reporter to the Self Storage Association as an example of how business, instead of government, can take the initiative in setting standards. The association represents 2,500 companies operating the garagelike storage depositories that are a fixture in so many communities.
There are 40,000 storage facilities across the country, with an average of 500 units in each, said Michael T. Scanlon Jr., chief executive of the association. Timothy J. McVeigh stored explosive material in a rented storage unit before blowing up the federal building in Oklahoma City, and after 9/11 the association worried that the federal government would regulate the industry to close it off to terrorists.
So what was once mainly a cash rental business is now more elaborate, and more costly for customers. With the blessing of Mr. Martinez-Fonts, the Self Storage Association is asking its members to charge renters $7.50 each to cover the cost of verifying their identities and ascertaining whether they have criminal records. A supercomputer does the verification, based on Social Security numbers, birth dates and other data.
Only 25 companies have signed up so far, Mr. Scanlon said. But the start-up date was in early September, and he said that he expects to add 100 companies a month. "We are the private sector trying to preclude the need for mandatory regulation by putting this 'get to know your customer' system in place before the issue arises,'' Mr. Scanlon said.
Elsewhere in corporate America, the payoff is coming faster. The Datacard Group, a privately owned company based in Minneapolis that had $300 million in revenue last year, is selling a mechanism that adds layers of sophistication to corporate ID cards. The company's package, called ID Works, includes a fingerprint reader, an iris scanner and a face recognizer - the paraphernalia of what domestic security experts classify as biometrics. They check the identity of a person presenting an ID card and verify that his personnel record, stored in a database, is without blemish.
"When a Paris employee of a multinational corporation shows up at the Hong Kong office, how does the Hong Kong office know that that person was not terminated a week ago and flew to Hong Kong to be disruptive?'' said Kevin Gillick, the head of corporate marketing at Datacard. "In an integrated world, you want to know instantaneously what has changed and what the status of that employee is.''
Apparently so. Sales revenue for the secure ID component of Datacard's business is growing at a double-digit percentage clip, Mr. Gillick said.
In another area, Motorola is a beneficiary of federal funds for radio equipment, mainly systems that allow police officers, firefighters and other emergency workers to talk to one another within a city or across an entire state. That is what police and fire departments failed to do in New York on 9/11. A number of communities are drawing funds from the Department of Homeland Security to avoid a repetition of that problem.
Motorola got $9 million for its share of installations in Georgia. The states of Alaska and Colorado are customers, too, said Deborah Phillips, a director of strategic marketing at the company. In July, Virginia awarded Motorola a $329 million contract to build a system in that state. Each one of the states "has done independent assessments of what they need to protect their citizens,'' Ms. Phillips said, adding that Motorola participated in several of those assessments.
While Motorola prods from the outside, Richard Hudak does so from the inside at Loews, bringing a lifetime of experience to the job. After graduating from Harvard, where he starred in football, he served as a Marine captain in Vietnam, then spent 11 years with the F.B.I. After that, he held various posts as a security consultant or executive, including a stint at the Sheraton Corporation.
That is where he first deployed window film. He needed a solution to a problem at the Sheraton in Rio de Janeiro: gunshots from a slum a mile away occasionally pierced and shattered hotel room windows. The window film prevented the shattering and stopped the nearly spent bullets, or most of them, from even piercing windows.
"It made me focus on window film not just as a defense against bomb blasts but also against burglars who try to smash a street window, grab something and run,'' Mr. Hudak said.
NOW he is moving on to other forms of protection. He considers concrete barriers inappropriate for the Park Avenue entrance of the Regency Hotel. If a barrier becomes necessary, or if he can get corporate approval for the expense, he will opt for something he considers aesthetically more pleasing: bollards, which are thick metal cylinders that rise hydraulically from tubes inserted in a sidewalk or street.
"If I just say to management, 'Put a cement barrier in front of the hotel,' they'll say, 'Think of something else,' '' Mr. Hudak said.
And so he has.