Hit the brakes, and go!
Wednesday, August 29, 2007/
Safe Effect Technologies has cornered a very special market – fail-safe braking systems, especially for heavy-duty vehicles – and is set to take on the world with it. By TIM LEVIEN.
By Tim Levien
For the first 33 years of his working life Ken Johnsen tried to make cars go. Now he’s trying to make them stop.
Apart from the vehicle connection, there is another common thread running through the life of an engineer who once helped run the high-profile Perth-based Orbital Engine Company.
He’s still trying to find a way to make profits.
Johnsen laughs when the stop/go comparison is pointed out. What else can he do? It’s true. He knows it. But he’s determined to find a way ahead for the latest challenge in his life as chief executive of one of the smaller companies on the Australian Stock Exchange, Safe Effect Technologies.
With a share price of less than 4¢, Safe Effect fits into that classic securities industry category known as “penny dreadfuls” – which is pity because the only thing dreadful about the business has been way it’s been managed in the past.
Inside Safe Effect, a name that Johnsen detests, is a very clever piece of Australian engineering – a fail-safe vehicle brake that lasts much, much, longer than conventional braking systems, even in the harshest environment.
Major mining companies, including BHP Billiton and Xstrata, are buying the product, which is marketed as the Sealed Integrated Braking System because it saves money and might save lives.
But, inside the executive suite it’s been a rolling disaster, including one of the longest waits for an announcement in the history of the ASX – two-and-a-half years.
Back in August 2003, the former management team at Safe Effect requested a trading halt in the company’s shares “pending an announcement by the company”.
The trading halt was lifted on 5 April 2006 – after Johnsen and a new management team had taken control.
“It’s been a pretty rough ride for the shareholders,” Johnsen told SmartCompany during a visit to the company’s astonishingly down-market combined office, factory and warehouse in the inner Perth industrial suburb of Osborne Park.
“We like to think of it as being like the Tardis from Doctor Who,” Johnsen jokes when describing Safe Effect’s world headquarters. “We’re certainly saving on rent.”
Doing that is important. Safe Effect is getting close to making a profit, but it’s not there yet. Sales of the SIBS braking system are rising and costs are coming down. Manufacturing has been shifted to a purpose-built factory in Thailand and annual sales rose from $1.36 million in 2005-06 to $2.5 million in the latest financial year.
Johnsen declines a request to share this year’s forecast budget with SmartCompany.
“I’ve been expecting to hit break-even for each of the past six months, but haven’t got there yet, so I’m a bit wary on forecasts,” he says.
Before looking at the business model – and why Johnsen was attracted from a high-flying career which included time as head of research and development at Orbital, head of the company’s US operations, and finally as business development manager – it’s worth a quick squiz at what should make Safe Effect go (and the vehicles with it fitted stop).
Most vehicle braking systems are open to the environment. Next time you’re passing a Porsche (parked on the roadside, obviously) you might notice the very large, red braking system on each wheel.
For most road cars, being exposed to the weather, and conventional road grime, is fine.
In a heavy-duty working environment, such as a mine, wear and tear on brakes is prodigious. Toyota Land Cruisers used by Iluka in some of its pits where garnet is mined require brake pad replacement every three days – garnet, after all, is what some sandpapers are made of.
Even in iron ore and coal mine grit tears into brake linings, and every other part of a vehicle.
The solution, with credit going to a Geelong-based engineer, is a sealed braking system that has the critical parts immersed in an oil bath. Wear rates are dramatically reduced with Johnsen trundling out a “payback calculator” that claims a $12,000 SIBS braking system pays for itself in 5.9 months.
But, if it’s been around for years (and even featured on a Beyond 2000 television program, which can be seen on the Safe Effect website at the top left corner of the home page) why has the business not succeeded?
“Over-promising, and trying to do too much,” is Johnsen’s answer.
“The technology is terrific, but when it was launched promises where made that it could be fitted to everything from shopping trolleys to jumbo jets.
“In reality this is a niche product which has a worldwide market in the mining sector, and perhaps a number of other specialist uses, such as garbage trucks, which stop frequently.”
As well as working well in tough environments, the SIBS system can have a “fail-safe” brake device fitted, which means whenever the vehicle stops the brakes automatically go into the “on” position – the opposite of conventional brakes.
With mining company directors petrified of being held responsible for deaths on site (jail terms can be handed down right up to board level under new laws) there is every encouragement for management to be ultra-safe.
For Johnsen, a skilled engineer who has flown close to the top of Australia’s corporate tree, the critical question is “what on earth are you doing here?”
The answer is that after 33 years at Orbital (he started there at age 20) he was made “an offer too good to refuse” and accepted retirement – which lasted four days, when he got a call from the people trying to revive Safe Effect.
“It seems they had found my details in the Safe Effect records from when I was at Orbital,” Johnsen said. “I had conducted limited due diligence on the company as it seemed a natural fit with Orbital. But, after looking at the finances, I suggested we wait and pick it up cheaper, later.”
That later for Orbital never came – and Johnsen went.
But, his interest in Safe Effect’s technology remained strong even if it didn’t in the finances.
The net result was Johnsen leading a major rescue effort, which included buying 50% of the intellectual property that was held by a third party, recapitalising the business in a series of steps that have left the company with a bloated 459.7 million listed shares (hence the share price of just 3.7¢), and the attraction of a new board of directors.
It’s the composition of the board, as much as Johnsen in the manager’s chair (behind the walls of the Tardis) that adds confidence to a belief that this time Safe Effect might go, rather than lurch to another stop.
Chairing the company is David Humann, a former managing partner for the Asia Pacific region of the big accounting firm PricewaterhouseCoopers, and Professor Malcolm Richmond, a former senior Rio Tinto executive.
A handful of institutional investors have drifted onto the Safe Effect share register, including London-based RAB Capital and Challenger Financial.
Armed with a product that sells in Australia, and is being carried worldwide by its mining company customers, rising sales (45 units a month is break-even), a high-powered board, and growing institutional investor interest, Safe Effect has every chance of getting going – by successfully making its customers stop!