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.

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.

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.

Water’s own demographic dilemma

I was fortunate enough to participate in the Water Leaders Forum at the Global Water Summit in Seville, Spain recently.

In the broader context of water utility performance, the question of how to attract high performance individuals to the municipal water sector was raised.

There were some great anecdotes and facts told by people at the round-table session on talent, which I think really capture the essence of the problem….and there is a problem.

One CEO of a North American water supplier mentioned that employee turnover in her organisation was about 2%, making for a hypothetical average tenure of about 50 years.

A senior member of one of the major global engineering consultancies told the story of how the senior executives in his firm were unwilling to give large amounts of responsibility to individuals under about 35 years old, in spite of the fact that they themselves had all taken on a great deal of responsibility in their organisation at a younger age.

Finally a young woman told how she had been promoted very rapidly within one of the major African water utilities until she got to a level where more senior executives would have had to move to make room for her to get a promotion. The organisation was relatively static, so there were no exciting change projects for her to work on, and she decided to leave the water industry. After several years she had recently returned as a consultant.

The fact is that globally the water industry has a rapidly ageing workforce, and the impending simultaneous retirement of 40%+ of the workforce over a period of 5-10 years will cause real problems.

The industry must start handing over real responsibility to its small cohort of under younger professionals. High performers thrive on being thrown in the deep end and being challenged. Given the opportunity they will make real and positive change in their organisations

With increasing use of technology the absolute shrinking of staff numbers may not be a problem, but the management of water requires professionals with real experience. It may feel risky to give younger professionals stretch assignments. However if you don’t empower your next generation of professionals now, then they will not be ready when the current generation of leaders retire…and then you will see the real meaning of risk.

Rising stars of global water

My previous post on the exit of Siemens from the water business prompted a lot of interest and a number of comments on Linkedin regarding rising stars.

It is clear that US and European companies that still have much of their cost-base and mind-set in the developed world are increasingly struggling to compete with emerging businesses in asia with international capability and a developing world cost-base. Interestingly Spanish firms, with skilled labour costs that look more similar to China than to the UK seem to lie more in the latter camp than in the former.

You don’t have to look any further than the recent award of the Al Ghuburah Integrated Water & Power project to see the possibilities.

Sumitomo corporation, with deep pockets and a strong appetite for global water projects and supported by a Japanese government mercantilist strategy, led the winning consortium.

They partnered (based on an existing strategic relationship) with Malakoff, a Malaysian contractor with extensive experience in the IWP space to own & operate the plant.

On the design and construct side Sumitomo has pulled in VA Tech Wabag (in which they have a stake) an engineering all-rounder with a cost-base firmly in India along with Cadagua to provide the desalination design engineering expertise.

Of course Asia centred consortiums have been successful in the Middle East for some time, but I suspect the break-out into international markets is not far off.

 

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.

Lessons from Marissa Mayer appointment

What is the connection between the water industry and Yahoo’s appointee CEO Marissa Mayer I hear you asking.

Not very much is my response, which is the point of my post.

Mayer is 37 years old and has 13 years total experience in the workforce, and is taking the CEO role of a company that does 5 billion dollars a year in revenue.

The first question that sprang to my mind is how someone could build up the level of management experience in such a short time, even within Google, required to take on the CEO role of a large listed corporation.

I watched an extended interview with Marissa in a public forum conducted in January this year. She told the interviewer that “Larry and Sergey threw us in over our heads and shouted at us until we became the people they needed us to be”.

It is a fundamental truth that smart, capable people learn best and fastest when they are given responsibilities (and the corresponding authority) well beyond their existing capability and experience.

The water industry as whole tends to be bad at this and there is a real shortage of young people in senior executive roles in water.

Whether Marissa succeeds or not at the Herculean task of turning Yahoo around, just her selection for the role is an impressive achievement.

I would love to see more young water professionals given the opportunity to overacheive like this. The industry will be better for it.

Indonesian water PPPs, SPAM and the Great Giant Pineapple Co.

Earlier this year I visited my old stamping ground of Jakarta to attend a two day conference on opportunities in the water sector in Indonesia.

Only around 30% of Indonesian’s have access to a reticulated water supply and there is almost no fully potable reticulated water. There is almost no reticulated sewer in the whole country; Jakarta, a city of nine million people, is only 4% sewered.

Given that Indonesia is the fourth most populous country in the world with 240 million people there is plenty of work to do.

The Indonesia federal government is keen to attract private sector investment into infrastructure and is bending over backwards in putting together the governance structures and guarantee organisations required to attract investment. Indonesia’s recent credit rating upgrade mean that now would appear to be the time to get busy building water infrastructure in the big archipelago under PPP contracts.

What the catch you say? Well it turns out that in most of the country the provision of water services is the right and responsibility of local governments or PDAMs. Many PDAMs are effectively bankrupt and have very limited organisational capacity. Tariffs are set by local politicians and are nowhere near cost-recovery. They do not make promising partners.

The federal government and a number of semi-government financial institutions are currently in the process of pushing through a couple of complex bulk water supply projects under a PPP framework. These seem unlikely to go smoothly.

One of these SPAM projects  (SPAM is the abbreviation in Bahasa Indonesia for a drinking water supply project) in Bandar Lampung has now moved to the second stage of the tender process. The tenderers are a curious blend of Korean, Japanese, Philippines and Indonesian financiers and engineering firms. Interestingly Manila Water’s local partner is one of the world’s largest pineapple producers, the Great Giant Pineapple Co. with a plantation in Lampung…presumably also  looking to also be an offtaker for the water produced.

Watch this space…I believe there are huge arbitrage opportunities for parties that can truely understand and manage the very real risks in the Indonesian PPP market. Those that nail this will have the pick of the most lucrative projects as Indonesia builds out its basic infrastructure.

We have customers?

I am blogging from the Australian Water Association annual conference, Ozwater, in Sydney. It has been a relatively quiet conference, as the local water industry is in a bit of a hole. Sydney Water has spent all its capex budget on a big desal( which will be mothballed in a couple of months) and is not releasing much work while they go through yet another round of restructuring.

The interesting narrative I am taking away from the conference is an increasing focus on customer value. In his keynote address the new MD of Sydney Water, Kevin Young, placed the focus of his organisation squarely on generating value for the customer.

Australian East coast water utilities have as much as doubled their customer tariffs to pay for the emergency drought infrastructure they built in the latter part of last decade. Customers were not too thrilled to be paying so much for drought infrastructure while they were trying to deal with floods (welcome to Australia).

In one case community anger actually compelled the struggling Queensland government to reverse the amalgamation of three local government utilities into one more sensibly sized entity. Watching one senior water executive being (figuratively) torn down by an angry mob seems to have really got the attention of the rest. Cochabamaba style civil insurrection seems just around the corner (okay…i am dramatising a bit for effect here).

At previous Ozwater conferences it would always amuse me how little the word customer would come up. If you were to do a word cloud with the different words appearing in the conference proceedings customer would be microscopic. At this conference it would still come a long way down the list after asset, corrosion, disinfection etc. but after having front row billing in the keynote speech of the MD of one of the country’s biggest utilities, you can bet it will pop up a lot in 2013.

Can water get smart?

I was just watching a video interview with the CEO of TakaDu, a Software As A Service provider of real-time network analysis and reporting services to water utilities. They apply their algorithms to pressure and flow data generated by water utilities’ online meters, then notify the utility when their analysis suggests there is a leak in their network. They have packaged this all up in a sexy browser interface so when users get notified through SMS or email that there is a problem they can immediately log on to any computer and see the nature and location of that problem.

Okay, so this is a great product wrapped up in a very smart business model. It provides an important piece of the puzzle for creating a truly adaptive organisation…real-time information distributed to front-line individuals in a manner which is easy to understand and respond to. The SaaS model means that TaKaDu does not have to give away their core IP, the algorithms that translate the raw data into useful information.

The thing that really jumped out at me from the interview however, was something the CEO, Amir Peleg, mentioned as an aside. None of the people involved in TaKaDu at start-up stage were from the water sector.

TaKaDu was taking a well established technology/business approach, SaaS, which has been around for about 15 years now, and using it to revolutionise the way another established field…network modelling…is applied, in a way that is completely transformative.

The fact that this idea emerged from outside the sector makes me wonder whether the existing water community will be able to be sufficiently innovative and adaptive to remain relevant as the nature of the industry changes…or will many of us be left behind by step-change. Seeing large, dominant organisations brought to their knees by radical change is no longer unusual. Will the water majors be next?

At H2Otalent we believe that the water professionals who will thrive in the next decade will be passionate, innovative, visionary and inclusive. Is that you?