The “Productisation” of water tech?

Is the customised system integration business model under attack?

GE recently introduced a new control system product to the market. It is specifically target at the operators of small scale wastewater utilities in North America.

It is notable because it has clearly been through a proper product development process.

First of all they have identified a customer segment. In most industries this would not justify being put in bold, but it is not a normal approach in water.

They have clearly looked at the needs of that particular customer segment. Small scale wastewater utilities do not have much by way of money, staff or technical capabilities.

So GE produced a robust, low-cost control appliance that can be installed and commissioned by any electrician and operated through an intuitive interface on any PC or mobile device.

The product is highly standardised, and because it is tightly targeted at a particular customer segment it has limited features it is cheap and easy to sell. In fact you can buy it online!

The product has been enabled by a new cloud based industrial control technology owned by GE, the PACSystems® RXi platform, but the underpinning technology gets minimal coverage in the marketing material. The marketing rather focuses on translating the features into specific benefits for the customer segment.

GE was struggling with the prevailing business model in water, which is to provide extensive customised application engineering around a core technology. This model does not play to GEs strengths, and in fact its rigid system of management controls meant GE didn’t have the flexibility to provide customised solutions. No doubt they were not enamoured with the dismal profit/risk ratio either.

However GE have the corporate muscle to redefine how the water sector operates. They have the product development capability to generate highly standardised (and therefore highly profitable) products and sell them directly to targeted end-user customer segments.

GE’s Pump Station Appliance is part of a wave of Productisation in the water industry, which will unlock a great deal of value, but be the undoing of a number of industry players along the way.

More on this later,  but contact us at H2Otalent if you want to get the talent that can get you ahead of the wave.

Opportunities abound…step up!

I see some massive opportunities in the global water industry right now, but who is stepping up to the plate?

Anyone who has been in the industry for a while understands that the water industry is all about process risk.

Everyone from the consumer to the biggest industrial player wants water to “just work”. This means they want to pay for water of a particular quality and have the vendor take risk for the whole process.

Whenever a big industrial conglomerate tries to play in the water space (think GE and Siemens), they find that only the lowest margin, most commoditised equipment can actually be treated like a pure-play product. Everything else is actually a unit process, and has to be provided with a guarantee that it will work. Given that every feed-water is different and highly variable, this means you have to offer an engineering service.

Suddenly the scale-based advantages you get from being a massive industrial based conglomerate is working against you as you try to manage the engineering risk for thousands of customised global projects via an elaborate hierarchy.

For me Veolia Water is the barometer for the industry. To me they had two major advantages. They have water people all the way up the organisational hierarchy who instinctively understand the nature of the water industry. Secondly they have traditionally not needed to impose a traditional management hierarchy because everyone went to the same few Grandes Écoles and understood each other implicitly.

These days Veolia trying to manage project risk by putting thousands of small projects through a lengthy approvals process of the type preferred by the Securities and Investments Commission…and it is not working well.

So come on. Bring your start-up capital, come to us to find you some BD, commercial and process talent…set up a sensible risk management process, then all you have to do is grab some project finance and you are away.

Siemens is out…who is in?

People had been talking for years about Siemens’ struggle to integrate the US Filter water product portfolio they acquired from Veolia. It seemed that it was always a struggle to integrate water treatment products into what is essentially a big mechanical-electrical firm.

On paper it looks like there should be synergies, but if you can’t find a way to get the products you want to synergise across within a single P&L then from an organisational perspective it is difficult to make it happen. Your water treatment sales guy is never going to try and sell drives unless he (or his manager) has some incentive to do so, and vice versa.

Like GE Water, I believe Siemens also struggled with the idea of taking process risk. I am sure Siemens senior management has a very good idea of the risks involved with automation and control, but I very much doubt they were comfortable with taking whole-of-process risk, which is what you really have to do if you are going to try and derive some scale benefits from holding a range of process equipment.

So Siemens is on their way out of treatment, and I am pretty sure that GE now has water sitting firmly in the cash-cow section of their Boston Matrix…milk the strong technology portfolio they acquired in the most low-risk, low-cost way possible until it becomes commoditised then let it pass slowly away.

So good old Veolia and Suez, what ever you may think of them, remain pretty much the only game in town when it comes to global water process firms. Given the kind of overhead these firms have to carry in Paris, I think that there is a huge opportunity for another player to move into the global water & wastewater process space.

They way to do it though is not to go out and buy technology. Technology is important but secondary. Now is the perfect opportunity to put some money behind a global team of experienced process engineers and specialist sales people and create a new global water process brand. Anyone who is interested give me a call…the talent is there and waiting.

Infrastructure Australia Report

 

In my previous post I mused on the possibility of governments selling or leasing brownfield infrastructure. Infrastructure Australia, a Federal Government peak body influencing infrastructure policy in Australia, just released a report on this topic.

The report promised to identify assets suitable for sale, but sadly it was  devoid of much juicy detail. It did however aggregate the asset base value of all publicly held water infrastructure in Australia, working at an equity value of 1.1x the asset base.

Australia has AUD96 billion dollars worth of water assets, but is carrying 36 billion dollars of debt over those assets, leaving a net balance sheet value of 60 billion dollars.

There is definite interest in offloading some of these assets, and the metropolitan areas of Sydney and Melbourne were singled out as geographical regions where the regulatory structure is already in place to allow it to occur.

You can find the report from Infrastructure Australia here: Infrastructure Australia Report.

Infrastructure Funding Gap – a solution

For me, the most pressing issue facing the municipal water sector currently is the lack of funding for new infrastructure. Around the world governments have no room to move on their balance sheets.

The clear alternative is for the private sector to step in. Retirement and sovereign wealth funds are still in need of long-term, high security  investments, but in most cases the water sector has not been able to find a way to unlock these funds.

One way to do this is to sell or lease water infrastructure. In Sydney, Australia the large municipal desalination plant was recently leased to the private sector. The plant was commissioned and operating, so had been de-risked from a construction perspective. The off-taker arrangement is with the AAA rated New South Wales state government.

The lease price was 300 million dollars in excess of the regulated asset base value.

It makes a lot of sense for governments to construct water assets under Design and Construct agreements where they have procurement expertise and are the best party to take the construction risk. Once the asset is commissioned then the government can lease or sell the asset to the private sector with the off-take contract in place, and take the risk dividend.

Where there is a monopoly water distributer owned by the government it is a much more attractive investment opportunity, from an off-take perspective, than a toll road.

How many water assets around the world are suitable for this kind of arrangement? More on that later.

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.

 

Brine management a major growth area

There is a great article here on the growth of the Coal Seam Gas industry in Australia. It is anticipated that 300,000 megalitres of highly saline water will be extracted every year from CSG bores in Australia, and the search for ways to manage that water continues.

This is not just about mining though. As fresh water becomes more scarce globally, inland farmers and communities around the world will increasingly turn to desalination to make use of higher and higher salinity water.

Along with inland desalination comes the question of brine management. How do you deal with all that high-salinity water? H2Otalent is already starting to see the growth of the brine management industry reflected in the positions we are recruiting for.

Watch this space.

The political after-effects of drought

Australia’s crazily stochastic rainfall is having serious political fallout, one to two years after a major east coast drought turned to catastrophic floods almost overnight. As climate change begins to replicate Australia’s climate in other continents, our lessons may be relearned by others.

Australia’s east coast states  spent something like AU$15-20b on drought mitigation infrastructure in the 2005-2010 period, including large desalination plants for every major city and a very extensive network of reuse plants and pipelines for Brisbane.

The dam water supply levels in every major city had reached critical levels in spite of severe water restrictions and in the case of Queensland, the state government had been planning for trucking water into the centre of the capital, Brisbane.

In every east coast city’s case the rain began shortly after the drought infrastructure was complete (sometime before in the case of Melbourne’s gigantic desal). Water utilities and state governments were left with huge bills for now unnecessary infrastructure.

The fun really began when people started to hear how much their water bills were going to increase to cover the cost of the capital works. Society’s collective memory is very short, and people hearing that their water bill is going to go up 15-20%+ a year for the next few years has caused a lot of political difficulty.

This has been particularly interesting in South-East Queensland, where a major restructure of the water sector for the purpose of increasing water security in the region was attempted during and after the drought. The result has been a rash of finger-pointing and political maneuvering between State and local government as both sides try to blame the other for cost increases. The fall-out could well bring down one or more local or state governments.

I think there are a few lessons here.

It is very important to avoid infrastructure lock-in if at all possible. Large scale solutions may be more efficient, but a modular and scalable response to water supply threats is likely to be less costly in the long-run. Moving early to manage potential threats before they become critical will leave more options on the table. Having a now unneccessary $3b desal plant operating on a take-or-pay contract can be  very politically awkward.

Expect people to forget their previous support for decisions made in-extremis…particularly when they get the bill.

 Don’t miss the chance to set up a more resilient system when the status-quo is threatened by a crisis…but make sure your alternative approach makes sense under both rainy and dry scenarios.

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.

Managing Change – The Power to the Edge approach

If you are a senior executive in a large organisation, you are unlikely to have the knowledge required to make major strategic decisions for your organisation.

This is a challenging idea for traditional hierarchical managers, but it is now pretty much accepted wisdom amongst management theorists. I have just been reading an article in the HBR titled Adaptability: The New Competitive Advantage . It makes the excellent point that in a rapidly changing and complex world, rapid adaption is itself a source of competitive advantage…if you can move faster than your competitors then you can beat them to new opportunities.

The article suggests a few different organisational competencies required for rapid adaption, but one of the key requirements is the shifting of authority in your organisation to the people on the front-line. This follows very closely the thinking of US military strategist John Boyd. He proposed that the military force that can adapt most rapidly to circumstances can outmaneuver an opponent. The critical point is that the individual on the front-line has the best knowledge of how to respond at a tactical level, and should be empowered as far as possible to make decisions themselves. Too much time is wasted referring decisions up a command-chain and the opportunity is lost.

That is fine as far as tactical decision-making is concerned, but how about strategic decisions? Strategic decisions must certainly be made by management, but the information that informs that decision-making must be collected from the front-line in the form of quantitative or qualitative data. The pathways for information to flow upwards in the organisation are even more critical than the pathways for information to flow downwards.

In summary, transferring the power in your organisation to the edge is the best way to create an organisation that can respond rapidly to external changes.

Leadership has to be performed at all levels of the organisation.

Unfortunately I come across very few organisations that do shift power to the edge. Most large organisations have heavily centralised decision-making and frustrated employees who see opportunities pass-by and are unable to act on them.

 To create an adaptive organisation, it is critical that individuals at all levels of the organisation have leadership qualities. Check out my post on leadership qualities for the water sector here.

You can find the US Command and Control Research Program publication Power to The Edge here