Codan

Codan 2017-04-15T09:04:41+00:00

Project Description

Shares in local manufacturer Codan Limited hit three-year highs last week as the company said continued strong demand in Africa for its GPZ 7000 gold detector has exceeded expectations.

The ASX-listed communications, metal detection and mining technology firm confirmed that first half profit would be well ahead of a year-ago.

This is a remarkable turnaround, for just a few years ago Codan’s 400-strong workforce had to watch sales and prices of its metal detectors collapse as Chinese counterfeiters sold cheap imitations into its key African market.

“We had allowed ourselves to get too far from our customers,” says Codan Chief Executive Donald McGurk.

“The thing that caught us by surprise was the way  they had been able to gain market share without us really understanding how they had done that. We had strong reason to believe that some of the dealers  we were distributing through were also selling  counterfeit products. So of course they were not giving us any information,” Mr McGurk says.

Codan promptly ditched its arrangement with the distributor and set up a presence in Dubai, the centre for that market.

“We got rid of all these exclusive arrangements and decided we would take more control of our product supply chain  and markets,” Mr McGurk told the AAMC.

Codan then redesigned the metal detector and embedded  military grade encryption in the software which safeguarded against counterfeiters.

“These two things allowed us to capture market share and keep out the counterfeiters which are obviously a form of competitor,” he explains.

In a three-pronged attack, Mr McGurk says Codan also invested significantly in other areas of its business.

“We  basically turbocharged our new product development expenditure to about 14% of sales to make sure that we were continuing to out innovate, out market and essentially out compete the Chinese counterfeiters and other more traditional competitors,” he says.

Happily for Codan, this has established a replacement market with the new improved gold detector selling  at a substantially higher price and margin. Customers are replacing both the counterfeit detectors, and the 120,000-or-so gold  detectors that Codan had sold over the previous eight years, generating enough cash to retire around $52 million worth of debt since 2014 and leaving the firm cash positive.

Through Codan’s tough times and innovation drive, Mr McGurk says the government R&D tax incentive was crucial as it significantly reduced  layoffs.

“What the tax incentive allowed us to do was to maintain employment so we didn’t have to make a choice of either/or. So the fact that we had the tax incentive meant that we could afford to employ sales and marketing people and manufacturing people at the same time as  innovating and developing a new product,” he says.

The uptake of the new products has enabled Codan to go on on a recruitment drive to fill  around 20 to 30 open positions across engineering, sales and marketing.

Codan, established in 1959 by three university friends in Adelaide, is predominantly an exporter, and counts aid organisations, mining companies, security and military groups, government departments, major corporates and individual consumers as customers.

Revenues last year were around $170 million, with only around $30 million  generated in Australia, mostly from gold  detectors  and   radio products.

“There is no reason why we need  to be in Australia other than  our legacy dictated that. We have a critical mass of intellectual property around our engineers  that makes it difficult for us to walk away from Australia — not that we have any desire to do so,” says Mr McGurk.

He says that the calibre of engineers does set Australia apart and Codan runs a graduate program, taking four or five graduates a year in engineering disciplines.

“We have exceptional skills here in Australia and we have a lot of good young people. These are some of the best performing people in terms of value for money over a 10 year period.”

Codan has received a defence grant to develop a dual-sensing metal detector which incorporates metal detecting and ground penetrating radar. The Australian defence force will use this to find explosive devices, which are generally plastic explosives with just little trigger mechanism in the form of fine wires.

“You have to use radar to find disruptions in the soil density to find these explosives,” Mr McGurk explains.

Codan’s Communications business made almost $70 million of overall revenue last year. Over the last three years the firm has spent a significant amount of money to reinvigorate this product line to get into higher value-add markets in Australia, and also in Canada where Codan has about 100 people.

“It is an innovation or die model that we have. You have  to do a lot of exploratory work and brainstorming and you have  to tap into the experiential insights and learnings  from other people. And you must  be able to decipher what you think would work and  can  commercialise from all of the ideas that are generated,” Mr McGurk shares.

Australia still has a promising future in manufacturing, however companies need to thoroughly assess the value chain, end to end, and become  globally relevant.  Australian manufacturers need to carefully define the markets they choose to compete in and ensure that they develop value propositions and solutions that are competitive.

“Unless what you are doing in someway, shape or form is internationally relevant then you are going to end up playing in a sandpit that is too small in Australia. So you need to have something that is competitive and that you can export ” Mr McGurk says.