To view this site you need Adobe Flash Player and your browser must allow javaScripts. Go here to get the latest Flash Player. MARKET MONITOR Research fuels Smiths’ profits and growth BY PHILIP FINNEGAN THE MANAGEMENT OF SMITHS DETECTION, LONDON, UK, SEES THE PROSPECT OF CONTINUING GROWTH WITH HIGH MARGINS THANKS TO THE COMPANY’S HEAVY INVESTMENT IN HOMELAND SECURITY-RELATED RESEARCH AND DEVELOPMENT (R&D). Stephen Phipson, president of Smiths Detection, told investors at a company investors’ day in Wiesbaden, Germany, on Jan. 27 that the company anticipates 10 percent to 12 percent annual growth over a three-year period with high 17 percent to 20 percent profit margins as achievable goals. Strong research spending is the key to this optimistic outlook. In 2008, Smiths Detection increased its company-funded research and development 10 percent to £29 million ($41 million), investing 5.7 percent of sales. Another 1.7 percent of sales or £9 million ($13 million) comes from customer funding of research and development. Smiths Detection has 2,300 employees worldwide, of which 538 are research and development engineers. That heavy investment allows Smiths Group to bring a continuous stream of products to market that can command premium pricing despite intensifying competition as more companies enter the business. Research investment also helps counter the pressures from tougher pricing as contracts become larger in the sector and government pricing scrutiny increases. petitors tend to focus on narrow areas of the market, rather than the breadth of markets and technologies being used by Smiths Detection. New technology In aviation security, the company is focusing research on the checkpoint of the future. It launched its aTiX automatic explosives detection X-ray system in October 2007. Normal X-ray has one view, but this technology has four X-ray generators offering four views. This enables automatic explosives detection so that laptops can remain in carry-ons and liquids can be identified. More than 500 of these systems have been deployed in the United Kingdom and the United States. In addition, Smiths Detection launched its “eqo” people screening portal in October 2008. The eqo system uses millimeter-wave technology to provide a safe, high-resolution image of passengers passing through a checkpoint. Smiths Detection is also working on new systems for hold baggage screening. Research is also key for the company’s military and emergency response segment. That market is now moving toward chemical detectors capable of detecting more chemical agents at lower levels of concentration with fewer false alarms. It is also moving toward integrated systems with systems of sensors. N AVIATION SECURITY, THE COMPANY IS FOCUSING RESEARCH ON THE CHECKPOINT OF THE FUTURE. I Economies of scale Yet R&D is not Smiths Detection’s only way of maintaining high profitability. As production grows, Smiths Detection is able to develop manufacturing efficiencies by taking initiatives that take advantage of greater economies of scale through lean manufacturing, outsourcing and finding low-cost sources of components. Smiths Detection’s overall size also works in its favor. It is twice the size of its nearest competitor. Before the rapid depreciation of the British pound, it was actually three times as large as its competition. As the largest company in many areas, it will naturally work with government regulators to define the requirements for future systems, build- ing on its advantage as the incumbent in providing existing systems. It also has the ability to move technologies between markets, such as from military to commercial applications. The company is the largest player in the combined transportation,ports and borders and critical infrastructure segments,according to data published by IMS Research that was cited at the investors’ meeting. Smiths Detection has a 29 percent market share,followed by GE Security, 15.5 percent;L-3 Security and Detection Systems, 12.5 percent; Rapiscan Systems, 8.5 percent; and Nuctech, 8 percent. It is also the largest company providing military, chemical, biological, radiological and nuclear detection solutions,having sold 125,000 chemical weapon detectors around the world. Its JCAD I contract to provide lightweight chemical detectors to the US military involves the production of 12,000 sensors annually. The company’s 2008 sales of £509 million ($72 million) came in a broad range of markets. Transportation, the largest segment, represented 38 percent of sales. It was followed in order of sales by ports and borders, military, critical infrastructure, emergency responders and non-security. Geographically, Smiths Detection is also well dispersed. Of its sales, 40 percent are in the United States and 25 percent in the European Union. The remainder comes from the rest of the world. Smiths Detection’s position as the largest company in security and inspection overall is highlighted by the more than 50,000 X-ray machines sold around the world and 20,000 trace systems being used in airports. Com- Acquisition growth Smiths Detection isn’t relying solely on research to add to its technological capabilities—it’s also looking at acquisitions. The company itself was created through nine acquisitions. One of the key gaps in Smiths Detection’s offerings that might be filled through an acquisition is in radiological and nuclear detection capabilities. Management sees the potential to pursue a market estimated at £700 million ($999 million) in 2012, a market that is important for its US programs. Although it developed some products, such as nextgeneration radiation detection and identification systems, it is not the owner of any core technology. That remains a key gap to close as the company seeks to develop screening portals. HST PHILIP FINNEGAn is the director of corporate analysis at the Teal Group, a firm based in Fairfax,Va., that provides strategic and market analysis to major corporations. He can be reached at pfinnegan@tealgroup.com. Register online today for exclusive online content and eNewsletters Homeland Security Today Magazine | May 2009 19