Gallagher Group: $200m and growing

By Anthony Doesburg

After seven decades, with annual revenue now nudging $200 million, this private company is happy to stay that way, reports Anthony Doesburg.

Gallagher Group has branched out from its rural roots, but agriculture is still 'the biggy', says Sir William Gallagher. Photo / Christine Cornege
Gallagher Group has branched out from its rural roots, but agriculture is still 'the biggy', says Sir William Gallagher. Photo / Christine Cornege

A horse named Joe is a lead actor in the story of how one of this country's most successful family firms got its start.

"Joe would rub his backside on the family Essex," says Sir William Gallagher, chairman and chief executive of Gallagher Group, the Hamilton-based business that his father Bill started more than 70 years ago.

Bill snr, a reluctant dairy farmer and inveterate tinkerer, came up with an electric shock device to dissuade Joe from using the car to scratch his itch. Thus was sown the seed of the Gallagher electric fence business, which today employs 1000 people and has annual sales approaching $200 million, mostly overseas.

Those numbers place the company 7th in the annual TIN100 report that ranks New Zealand's leading technology exporters. Gallagher is sandwiched between the air conditioning company Temperzone and stainless steel fabricator NDA Group.

All three are privately owned. Gallagher has the further distinction of making it on to an international list of "hidden champions" - companies described as inconspicuous, but ranking in the top three for market share in their global market, or No1 at home.

Gallagher is certainly the domestic market leader, at twice the size of rival Tru-Test. But there's nothing secretive about Sir William, who knows the value of a colourful backstory in helping lift the company's profile in image-conscious markets like the US.

"Father believed milking cows was the last job the good lord made and he wasn't that enthusiastic about it," says Sir William. His father didn't claim to have invented the electric fence, but his Waikato farm was the perfect setting for refining primitive US electric fence designs.

"The American approach was to chuck AC [alternating current] on to the fence. The problem was in wet weather they were pretty dangerous and in dry weather they were pretty useless."

As well as converting cars to run on coal gas during the war years, and working as a maintenance engineer at the Colonial Ammunition Company, Bill snr adapted a car ignition coil to make a safer and more effective electric fence. For anyone taking a shortcut through a farmer's paddock, the tick-tock of the coil was a useful warning that a fence was on, if you were in earshot.

The Gallagher electric fence business was launched in 1938 but didn't take off until the war ended. Advances made by the company and other Waikato pioneers saw the technology gradually mature into high-powered unshortable fences.

The new method of controlling livestock led to nothing less than the reform of agriculture, according to Sir William. "For about a quarter of the price of conventional fencing, you could now manage grass, with new grass each day."

Agriculture remains "the biggy" for the company, although the business is shifting from animal containment to performance and traceability. Gallagher's agriculture business, which includes animal fencing, live weighing and electronic identification, as well as wildlife fencing, today accounts for about half the company's revenue.

The company woke up to the opportunities beyond livestock fencing in the 1970s, the same decade Sir William joined the family firm.

"Anything that has a nervous system - from snails to elephants - can be kept in or out with today's electric fence," he says. "With a high voltage and quite high current, but a pulse of only a few microseconds, the nervous system reacts pretty violently."

But the shock of an electric fence leaves no lasting effect, other than an unhappy memory, he hastens to point out.

Gallagher's first big wildlife fencing customer was Malaysia's Federal Land Development Corporation, which was clearing jungle for oil palm plantations. The young oil palms were the "hors d'oeuvres" for a herd of 200 to 300 elephants roaming the peninsula.

"Half a dozen elephants could take out several acres - they'd pull the palms up, take the bit out of the centre and just lay waste. Land Development thought they could shoot all the elephants, but the conservation people didn't think that was a good idea.

"Someone had read about our electric fencing, so we got involved."

If the object in Asia was to keep wildlife off cultivated land, the experience translated well to Africa, where the idea was to keep elephants, rhinos and other big game animals inside reserves.

With all kinds of four-legged animals contained by Gallagher fences, the next opportunity was another type of terrestrial creature.

"The third area of our operations is what I irreverently call the two-legged livestock business - keeping people in and out," Sir William says. Electric security fencing is "pretty fierce, but very safe".

"It leaves no damage, not even a mark, despite what you might think as you pick yourself up off the ground.

"That's being used in prisons and critical national infrastructure. What we've got is not only an active deterrent, which makes it pretty unique, it's also an almost false alarm-free alarm system.

"You monitor it and if anyone starts cutting wires or shorting wires out you have an alarm. But rain, hail, shine or whatever, it doesn't go into false alarm."

That was good enough for Buckingham Palace, which installed a Gallagher electric security fence in 2004 after a protester dressed as Batman climbed on to a palace balcony.

"He was inside talking to the Queen and this was considered pretty bad form," Sir William says. "Within a few months the existing system was out and ours was in."

India's Parliament buildings and a US government facility in Virginia - "the boys call it the hunt camp, but we better leave it at that because some people get very sensitive when we talk about it" - are also kept safe by Gallagher perimeter security systems, as are several New Zealand jails.

Another aspect of the security business is "people access" systems. In 1999 Gallagher bought Marton business PEC, the target being the company's Cardax security business. "Cardax was the piece I really wanted - we had the perimeter and this was the gateway." Fences and card access systems combined represent a third of Gallagher revenue.

With Cardax came PEC's service station eftpos payments system, which was on-sold, and a retail fuel pump business that Gallagher has hung on to, making it a leading supplier of pumps in New Zealand and Australia.

"It was going to be closed down but we've turned it into a very profitable regional business. We supply basically all the pumps in New Zealand and about 60 per cent in Australia."

It didn't look that promising to begin with. Sir William says the pumps were a money-loser, but by focusing on building them more cheaply and reducing the company's operational costs, it was turned into a profitable business.

The company is eyeing South America for expansion.

"We're now the heroes in Marton but a for a while we were at the centre of the dart board."

Gallagher's total sales this year will be about $190 million and the forecast for the year ahead is about $212 million. Sales growth of 12 per cent might sound adequate for these times, but Sir William reckons it's "pretty miserable".

Between 70 and 80 per cent of sales are overseas, and the company's products can be found in locations as far flung as Kyrgyzstan, where subsistence sheep farmers are using solar-powered electric fences to keep wolves at bay, and Panama, where electronic ear tags are helping foil cattle rustlers.

But the biggest market is Australia, followed by North America.

As exports grew during the late 1970s, Sir William's approach was to form associate companies in target markets.

"The strategy was to find a local entrepreneur, make ourselves his most exciting and profitable business, then not too long after that be his main business. Then it's in his interest for us to become a minor shareholder - less than 50 per cent."

Sir William, who is 71, has outlasted many of his overseas agents. The company has ended up owning its Canadian, US and Australian distributors outright, as the original partners retired and sold up, and a changing of the guard is taking place within several European associate companies.

In the Middle East, an important market for security products, Gallagher's initial base was Dubai. It has since shifted to Lebanon, which is considerably cheaper, although it retains a Dubai office.

The Middle Eastern business is built around security, and customers include airport operators in Bahrain and Saudi Arabia and the Etihad Towers in Abu Dhabi.

The company had been used to 30 per cent growth in security sales, but expansion has slowed since building starts declined. That hasn't been the case in Britain, however, the biggest buyer of perimeter security products.

"In the UK, where we have been expecting to see a significant decline, it hasn't come. We're still growing, and that's basically because of national infrastructure work." Gallagher fences enclose many British electricity and gas facilities.

Aside from the part electric fences play in both the security and agriculture segments of Gallagher's business, a component of its card access system also crosses over between the two. Sir William says the same technology used in building access cards is in livestock electronic identification tags.

Those farmers who haven't yet discovered the benefits of electronic tagging and weighing will have added incentive in July, when it becomes compulsory for cattle and deer as part of worldwide animal traceability moves.

"Combining animal weighing and identification makes it a paying proposition for farmers," says Sir William. When dairy farmers put their cows on the scales daily as they exit the milking shed, for example, they can quickly pick up any sudden weight changes that may signal health problems.

Although electric fences make up less than half of total sales, Sir William says Gallagher still sees itself as an electric fence company.

And there's plenty of opportunity left for the product that got the business going. "About half of New Zealand farmers buy an electric fence each year. Nowhere in the world is the density of electric fencing a half or a quarter of what we have here."

Although the basic technology is 70 years old, innovation hasn't run its course. About 100 of Gallagher's New Zealand headcount of 700 are engaged in research and development.

"We have a relatively small basic research group and a larger number doing product development."

Many of those are software developers for sophisticated card access control systems, which handle functions such as drug test scheduling for mine workers. The company is a key supplier to mining giant Rio Tinto.

In the electric fence business, Gallagher is a heavy-hitter. Tru-Test, another New Zealand company, in which Gallagher has a 19.9 per cent stake, is a smaller but significant rival.

In the card access business, however, it is up against big overseas competitors such as Honeywell, which puts pressure on Gallagher to stay ahead in design.

Sir William says the company holds its own in technical capability, but doesn't have the name recognition of its rivals.

"When someone's going to put in a security system that might have a 20-year life, they want to be sure they're not buying something that might become a white elephant, so the pedigree of the company is really looked into. That's where we're at a disadvantage."

A little customer name-dropping - the Windsors, for instance - doesn't do the business any harm, he concedes.

Running counter to the trend of outsourcing manufacturing to countries where labour is cheap, Gallagher makes most of its products in New Zealand, which occupies about 400 people.

"The difficulty [in manufacturing overseas] is maintaining quality. You have to have very robust quality systems."

In one instance, a Chinese contract manufacturer ran out of the specified plastic, changed to another without consulting Gallagher, with the company only becoming aware of the switch when units began failing.

An export hazard Gallagher goes to lengths to protect itself against is having its designs ripped off. The company has hundreds of patents, and in March a would-be copycat of its method of synchronising pulses on multiple fences was successfully defeated in a South African court.

The other familiar export challenge is coping with the fluctuating exchange rate.

"One of our saviours is having Australia as such a big chunk of the business. The Australian dollar has really been quite kind to us."

In its other markets, the company mitigates the effects of the strong New Zealand dollar by a combination of currency hedging and continually upgrading manufacturing equipment to lift productivity.

Such investment can be an act of faith when it involves getting into a new line of business, Sir William says, but for the most part the business follows a clear set of capital spending rules.

"Business cases that meet the criteria are ticked off and we get on to it, and if the payback period is fast enough, we're losing money by not doing it soon."

Security is more complex than agriculture, and the side of the business Sir William is in charge of. He has his sights on the US federal security market, where Gallagher's card access systems are poised to take advantage of a tough new identity data encryption standard.

"When you hear tenders going out for 10,000 buildings to be fitted out - this is just one US government department - it is mind-boggling," he says.

"It's all there - the world's still to come."

- NZ Herald

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