Ethical Investment and Industrial Water

Norges Bank Investment Management manages the Norwegian sovereign wealth fund, worth approximately 800 billion dollars and holding 1 percent of global equity markets.

What I am saying is that these guys are not small and take an activist position, divesting companies such as Rio Tinto for causing serious environmental damage.

NBIM has six strategic focus areas for investment, with their top ethical priorities being Children’s Rights, Climate Change Risk Management and Water Management. Specifically they expect food, agriculture, pulp & paper, pharma, mining, water supply and electricity production companies to manage water scarcity risk. Generally they expect companies to make sure their water management is sustainable and that their governance structure can respond to water risks. You can see the details here.

Mekonnen & Hoekstra 2011 tell us that China, (a country with 19.5% of the world’s population and 7% of the renewable fresh water according to National Geographic) bears 22% of the global industrial water footprint and 26% of the grey water footprint (a volumetric measure of pollution).

Clearly if the world is going to continue to manufacture in China, there will be growing pressure on industrial companies from ethical investors like the NBIM to make sure their supply chain is employing best practice water management in China…which will take an enormous capital investment and really transform the industrial water market.

Industrial Treatment in Asia still exciting interest

I just got back from Singapore Water Week. Thanks to vigorous support from PUB, and their willingness to twist arms pretty hard, the water industry turn-out for water week was strong.

Interestingly though, the mood in the trade hall was relatively sombre. The major players we spoke to who depend on market growth to grow were somewhat bearish on the rest of 2012.

However new entrants are definitely seeing opportunity to take market share…particularly in industrial water treatment throughout Asia. They seem particularly interested in industrial wastewater, with strengthening environmental regulation in China and SEA forcing industrial customers to clean up their game. Everyone has their eye on Indonesia, trying to judge whether now is the time to jump into that market with both feet. In the meantime domestic EPC players continue to prosper.

In other interesting news Lanxess was pushing their new RO membrane range pretty hard, evidence of the true commoditization of polymer RO membranes for the mid-market. They seemed to have nothing much new to offer from a technology perspective…and seemed to be just hoping to leverage their resin sales network.

Mann +Hummel also had a big presence in the SIWW trade hall, with the UF products they acquired with the Singapore membrane business Ultra-Flo in 2010 on display. They have an active strategy to diversify out of automotive filtration and it will be interesting to see whether they find water as attractive a market as they hope.

With all this activity, as usual there will continue to be a huge demand for bilingual technical sales professionals in growth markets. In water the good sales guys tend to be a barometer for the relative strength of different technology businesses.

 

Bangkok floods reveal inadequate risk assessment by multinationals

October 23rd’s Financial Times article on the current flooding in Thailand tells us that the global supply chain of auto-parts and hard-disc drives has been interrupted by the inundation of the industrial heartland to the north of Bangkok.

A quick online search reveals that Bangkok is known to be highly vulnerable to flooding. A 2009 paper by the East-West Centre states that flood protection in Bangkok is inadequate for even a 30 year flood event.

Water related risk, which can result from too much, too little, or the wrong quality water, needs to be taken seriously by any multinational with a global supply chain. However water related risk makes it into the risk section of very few financial reports.

Incidentally, both Shanghai and Guangzhou are listed in the top ten list of global cities vulnerable to coastal flooding…both favourite locations for multinationals in China. Do you know what the water related risks are to your supply chain?

Water industry opaque to outsiders

I was excited to see a full length article about the water industry in the Financial Times hit my inbox this morning. For a large industry, water gets very little coverage in the world’s premier financial publication. Water stories generally appear under Energy in the iPad version.

I was unsurprised then to find the analysis shallow, and while making a valid point, largely wrong.

The drive of the article is the industry must globalise further to meet the challenges of water shortages. I am inclined to agree, although the inherently local nature of water related challenges limits the traction global firms can get.

The authors claim that ” few water companies operate outside a confined geographical area”. Even by the narrowest definition there are many global water players, and if you broaden the definition to include technology firms there are hundreds.

They also claim that European  firms have not been involved in developing water supplies for India, China etc., which is completely wrong.

Where they are correct is that from a British perspective the general trend seems to be against globalisation. Most of the regulated UK utilities have sold their overseas interests over the past 5-7 years.

However the Middle East remains a playground for major infrastructure providers from all over the world. North Africa, the Philippines and India are all trending towards increased foreign participation in their water markets.

While China has seems to be less excited about foreign participation in their water sector, there has been an interesting increase in globalisation inside the chinese speaking countries, with Singaporean firms significantly increasing their mainland China presence. Also in Asia, the Japanese trading houses are developing their water DBO capability as fast as they can through international acquisitions.

Finally the Spanish water DBO firms are expanding internationally at breakneck speed, achieving significant wins in South America, North Africa and Australia.

I think we can safely say that the trend is towards globalisation, and the pace is just about as fast as is politically possible.

We can also say that the water industry is still an enigma to the broader business world.

China’s desalination boom

H2Otalent anticipates a major boom in the desalination industry in China,  as demand for water increased and alternative supply options fall away. H2Otalent’s Isa Cruz attended the Qingdao Desalination Conference last month, attended by representatives from all over the world positioning for a piece of the action.

Isa Cruz at the Qingdao Desalination Conference
H2Otalent’s Isa Cruz at the Qingdao Desalination Conference

This excellent Circle of Blue report documents a proposal by a respected Chinese engineering professor to build a desalination complex that will pump water 3,400 kilometres to Inner Mongolia and provide the water supply to exploit a massive coal field.

 
While this proposal in controversial, the fact that it is being proposed at all does show how seriously China needs more water.
 
The South-to-North pipeline project, which was going to effectively take water from the Himalayas to Beijing is bogged down in construction challenges, and expected to yield less water than originally planned.
 
Desal seems like the only remaining option to stop Beijing drying out. The government agrees, with a substantial increase in desal capacity specifically stated in the latest five-year plan.
 
Desalination is also one of the more obvious niches where multinational EPC firms looking to make their mark in China can be competitive. Domestic firms have their hands full delivering less complex and risky wastewater and industrial water treatment plants, and few domestic firms have the capability to deliver a large desal plant.
 
Companies like Aqualyng and Befesa are already delivering plants.  A local JV partner will definitely be required, and non-recourse finance is now obtainable for China projects.
 
A word of warning though, local engineers with desalination experience are still thin on the ground, and in great demand so be prepared to pay top dollar for local talent. Feel free to contact Isa Cruz on isa.cruz@h2otalent.com for further information on entering the China market.

Build global talent shortage into planning

The global water talent market looks increasingly constrained, with a shortage of mid-level talent even in countries with high levels of unemployment. I cannot emphasise enough that you should build high salaries and talent-shortages into your business planning.

We are observing the most severe talent shortages in Brazil and China, where it is very difficult for global companies to identify English speaking talent with a reasonable level of techical knowledge and relevant experience. I will reiterate that companies should not expect to pay substantially lower salaries for high-impact professionals in China than they would in Europe or North America.

In Brazil they can expect to pay more.

Australia continues to lead the world on water industry salaries, with another resources investment boom working its way through the economy; mine infrastructure construction is sucking up the tiny amount of spare capacity that was there previously. Expect to pay between 1.5x and 2.5x what you would pay in Europe or North America for junior-mid-level Engineering talent.

For high-impact, strategic hires (H2Otalent‘s specialty) you should be prepared to offer both competitive salaries and a compelling organisational structure and strategy. See my earlier post on attracting leaders here.

Even more critically you should have a policy in place for opportunistically hiring and utilising water leadership talent even when you do not have a formal vacancy in your organisation. The alternative is to make-do with whoever happens to be available when you have a vacancy, which could mean the best people going to your competitors.

China and Point-Of-Use

Could China be bypassing the centralised potable water treatment paradigm and skipping straight to POU?

I recently attended Aquatech China in Shanghai, the biggest water technology trade show in China. There were hundreds of Chinese membrane manufactures present, with both high-pressure and low-pressure membrane solutions.  Most were targeting the domestic market, and it was clear that the government endorsed strategy to grow a domestic membrane industry is working.

More interestingly though, at least half, and perhaps two thirds of the exhibitors were selling  point-of-use products. Over the years I have heard many  people argue that it is ridiculous to send potable quality water through the network for all household use, when only a tiny fraction of the water consumed is actually for human consumption. Third-pipe systems are an alternative, but require costly duplication of infrastructure.

The alternative is to send partially treated water down the network and have consumers treat their own water at point-of-use. This idea is an anathema to those steeped in the John Snow school of taking control away from the consumer for their own good, and seems unlikely to get anywhere in developed countries.

In China however, where the availability of high quality potable water out of the tap is far from universal, but a relatively wealthy and educated middle-class is growing rapidly, demand for high quality potable water is resulting in a high demand for point-of-use treatment solutions.

I wonder if the bulk of China’s cities may bypass the John Snow paradigm and move straight to consumer control of their own water quality.

talent – THE source of sustainable competitive advantage

One of our market contacts that delivers white label package treatment plants and skids recently informed us that clients are increasingly willing to accept copies of well-known water product brands produced in countries with minimal intellectual property protection.

So with intellectual property increasingly under assault as a source of competitive advantage, how can organisations survive with reasonable margin in the water industry?

It will come as no surprise to readers that in my view, talent is the only true source of competitive advantage. As long as you have an innovative R&D team in your organisation, you can keep ahead of the imitators.

With the water industry capex set to grow at around 6% year-on-year for the next five 5 years (Global Water Intelligence) the competition for that talent will remain intense.

So how do you attract and retain the best people? The good news is that most organisations are not very good at this so it is easy to outperform. The bad news is that your organisation is probably one of the bad ones.

Here are my top three tips.

1. Have a coherent strategy! 

I rarely come across a company in the water industry that has a coherent strategy which all members of the organisation are able to articulate clearly.

Smart people know that working in a company without a coherent, comprehensive strategy can be hell. Have a great story to tell…people love a great story. Make sure it makes sense from every angle because great people will see any inconsistencies.

2. Give real responsibility with accountability

 Great people want agency. You must give your star employees the room to do great things. If you have the high-level strategy in place then micro-management will be unnecessary.

3. Be generous

Reward high achievers. Give your people the best technological support available. Make their work lives comfortable. Give them access to plenty of training and development opportunities.

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If you can nail these three things then you are well on the way to attracting and retaining the top people, and achieving sustainable competitive advantage.

Attracting and retaining staff in emerging markets

I have to confess to being a Harvard Business Review junkie…but for good reason. It is always packed with good quality content.

November’s issue is no exception, with a great article on retaining talent in emerging markets titled “Winning the Race for Talent in Emerging Markets”. This is highly relevant for water businesses looking to maintain or build a business in the BRIC economies.

Research shows that even strong and established international brands cannot coast on their existing brand value. This ties in with a conversation I had recently with an engineer, originally from China. He said that in China the salaries offered by local companies were now comparable to those offered by multinationals. There was not a strong financial imperative to move to a foreign firm, and staying in a domestic firm offers a lot by way of comfort, stability, and not having to do three am conference calls.

 So how can you attract these people to your business? You have to leverage all the strengths you have as a multinational business. Professionals in emerging markets feel a tremendous sense of opportunity, and to attract and retain those professionals you need to provide Brand, Purpose, Opportunity and Culture.

Brand

Your public brand must be strong enough that potential employees want to be associated with it, but your employer brand must be for providing insirational leadership, and challenging employees to excel.

Opportunity

You must provide a career fast-track option. Provide employees with stretch assignments and give rapid promotions to those who succeed. Remember that there is a sense of opportunity, and top employees don’t want to miss the boat.

Purpose

In developing markets, your employees will have often experienced poverty and social injustice themselves. Having a higher purpose as part of your organisation’s mission is even more important than in developed economies.

Culture

Your brand must be authentic, your organisation must “walk the talk”. You must also have a meritocratic culture, where a graduate entering your business in Dalian must be able to believe they can end up in the executive suit in New York or Paris.

Of course, setting up systems and processes that allow you to deliver on these promises is costly and demanding, but promising then not delivering is disastrous…and doing nothing is not an option if you want to hire the best people.