A Business Analysis of the World's Water Industry

Think diversity: the water industry is not homogenous, it consists of a plethora of niches and narrowly defined markets - says Cliff Ransom, of Ransom Research

While the need for water is universal, the water business is anything but uniform.

Ransom Research, an independent investment research firm that studies a targeted band of companies in the manufacturing sector, has studied the water business profiles around the world.

On the supplier side, differences in structure, market approach, and offerings make it very difficult to perform classic apples-to-apples comparisons among the major players.

In the customer arena, the historically conservative, risk-averse municipal buyer stands in sharp contrast to a private sector that welcomes the cost and efficiency benefits of new technology.

Superimposed on this multivariate equation are trends such as stricter government regulation, the pressure to lower energy consumption, mounting treatment and scarcity issues, and efforts to establish a global footprint.

The consolidation that has characterised the water and wastewater industry over the past several years has created a number of what Ransom describes as "well-managed investment vehicles".

More M+A activity is likely to occur, he predicts.

Still, the industry structure remains highly fragmented, with many entities specialising in either products, services, or the aftermarket.

Those with a product orientation often subdivide their focus further, into products, packaged systems, or integrated solutions.

Some of the companies that operate in all three spheres do so in response to a customer push for added value, such as the desire to capture flow information, not just install new metering equipment.

From a technical perspective, Ransom uses the example of the process of reverse osmosis for drinking water to illustrate just how narrowly defined market segments can be.

While facing superficially similar conditions, systems and equipment to convert brackish water to potable water will not be the same as those used for seawater, due to the need for different membranes, pumps, and line pressures.

Any in-depth look at solutions providers has to take these kinds of distinctions into account.

Further complicating the business mix is the fact that the same or similar pumps, motors, valves, and associated equipment such as monitoring and control systems can be deployed in numerous related industries.

Some of the sectors with cross-over applications Ransom cites are: oil and gas, including exploration and development; petrochemical and chemical processing; pulp and paper; mining; food and beverage; aerospace/defence; pharmaceutical; and power, from diesel motors and gas turbines to hydroelectric facilities and nuclear reactors.

The distribution chain is equally divergent, as direct sales personnel, manufacturers representatives, resellers, and distributors all compete for the customer attention.

The level of expertise and systems integration capability among sellers also varies.

The crowded field of competitors makes it challenging for an equipment vendor to build revenue by expanding into the service side.

So far, according to Ransom, no one business model has been able to claim primacy in the distribution channel.

On the other side of the desk, customers in the municipal drinking and wastewater markets are known to prefer the safety and stability of precedent over innovation.

New technology can take several years, if not decades, to migrate into these sectors.

Decision-making is a complex process, often inserting layers of consulting engineers, specialised contractors, and academic input between the buyer and the final contract.

Multiple opportunities exist for players in the value-added distribution channels, including systems integrators and bundlers, to exert their influence, especially in drafting specifications that will favour their products or services.

Brand loyalty plays an important role in buying decisions, and direct customer experience with existing installations can give a vendor a special edge.

If not the primary business drivers, technological advances and lower costs do serve as major competitive differentiators.

The appeal of maximising uptime while minimising maintenance, downtime, and energy consumption may first be recognised by the early-adopting, for profit industrial sector, but it also resonates in the municipal realm.

Speed and efficacy in new product development, commercialisation, launch, and ramp confer significant advantages to vendors.

For example, the plummeting cost of membrane technology and the new generation of energy-efficient pumps and motors can be powerful boosts to adoption and sales.

The flip side is that large players often acquire the enterprises that introduce innovations in order to accelerate industry adoption and to control the flow of disruptive technology.

And then there's the court of public opinion to consider.

The closed-loop water system, in which wastewater is processed and recycled back into potable water, has been slow to catch on with consumers.

Nevertheless, Ransom declares the trend 'inexorable', especially in light of regional droughts and increased attention to climate change.

Future opportunities for suppliers lie in expanding geographic scope, offering new levels of service and cultivating the growing aftermarket, and helping customers address heightened regulation.

The pursuit of a global strategy entails more than just establishing geographically differentiated sales channels, he warns.

It may require a manufacturing presence or a low-cost country sourcing strategy, along with attention to the various physical and regulatory hurdles that come into play.

More precise monitoring and alarming capabilities have rising commercial appeal, especially in light of higher labour costs and mounting government penalties for non-compliance.

While consumables used in testing provide a repetitive, annuity-like income stream, savvy providers recognize the value of the data their equipment automatically collects from customer sites and look to translate that into further revenue opportunities.

In the meantime, the original equipment aftermarket, a realm that spans spares, retrofits, upgrades, and service, represents a locus of very consistent and very steady growth.

In the regulatory arena, the burgeoning array of wastewater contaminants (nitrogen, phosphorus, pathogens, viruses, etc) demands enhanced detection ability, propelling the refinement of measuring instruments and a corresponding shift in the standard scale from parts per million to parts per billion.

In a similar vein, the upsurge in challenging materials in the waste stream has created the need for heavy-duty disposal equipment.

At the end of the day, despite the divergent contours of the business, it's the demand for water that ultimately advances the industry.

As Ransom observes in his typically forthright fashion "The reality of global development means that national and personal priorities shift to safe, assured, and plentiful water resources.

In my opinion, participation in this sector will lead to continued investment success".

This article was supplied by ITT Fluid Technology.

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