A Sneak Peek Into WATER WORLD

The water market is one of the world's five largest markets, amounting to $400 billion, and growing at 7% annually. In comparison, the $600 billion energy market is growing 1% a year. The semiconductor market is only half the size of the water market. In the U.S. alone, the water industry is expected to grow 7% a year to $150 billion. One factor driving this growth is that America's water systems—some of which were built during the Lincoln administration-- are crumbling. As a result, there are more than 200,000 water main breaks per year and as much as 80% of the water intended for delivery to consumers is lost en route. The nation's infrastructure for water delivery is in dire need of investment: the EPA suggests that $15 to $20 billion per year needs to be spent to address these issues versus current spending of around $3 billion per year.

The worldwide demand for water and water treatment is torrential. For instance, China plans to build 375 wastewater treatment facilities by 2009. The World Bank has estimated that in 2007 investments of between $400-$600 billion were made to meet the demand for fresh water.

Costs for treated wastewater in North America are usually between $1 and $39 per 1,000 gallons treated, while costs for USP purified water average $20-$60 per 1,000 gallons.

Industry

According to Stanford Washington Research Group, The global water market is widely estimated to be between $350-500 billion in annual revenues, with the U.S. market in the range of $95-150 billion. By any measure, the majority – about 60% of the total both in the U.S. and globally– comes from water and sewer utility revenues, most of which remain in the hands of local governments around the world.

The breakdown of the global industry is as follows: Municipal water & sewer revenues ($200-220 billion); Equipment & services ($75-80 billion); Contract services ($32- 40 billion); Transmission, delivery ($16-20 billion); and Chemicals ($13-20 billion).

The breakdown of the US market is as follows: Water and sewer utility revenues ($63 bil); Infrastructure construction ($19 bil); Treatment equipment ($8 bil); Treatment chemicals ($4 bil); Contract operations & maintenance ($4 bil); Consulting ($3 bil); Residential commercial POU/POE ($2 bil); and Analytical instrumentation ($1 bil).

Key Challenges

The outlook for growth in private sector participation in the municipal water and sewer markets that currently dominate the overall sector remains less clear. “Privatization” or “public-private partnership” in owning or managing water and sewer utilities remains highly controversial. Some environmental activists, along with many local government officials, remain vocally opposed to the private sector gaining a profit from bringing direct capital investment into the sector. However, private sector investment in government-controlled water systems, via taxes and tax-subsidized financing, or even charity, is fine.

The United Nations’ “Millenium Development Goals” state that 1.2 billion people already lack access to clean drinking water and 2.4 billion lack access to adequate sanitation, with these numbers continuing to rise. The UN set a goal in 2002 of reducing these numbers by half by 2015. However, Water is still largely taken for granted by consumers, governments, and even by industries that heavily depend on it. Corporations around the globe are at risk, since many industrial users – including agriculture, power, pharmaceuticals, food and beverage, microelectronics, and petrochemical – are dependent on a clean water supply to make their products.

According to the EPA in the US, 53,000 community water systems will need an estimated $277 billion over 20 years to upgrade their infrastructure in order to provide safe drinking water, with medium and large systems (those serving 50,000 people or more) comprising about 80% of the total. These include – transmission & distribution ($184b); treatment ($53b); storage ($25b); and source/supplies ($15b).

The second largest category of needs is treatment systems, which represent about $53 billion in total needs over 20 years and about $24 billion of current needs. This includes projects to install filtration, disinfection, corrosion control, and aeration, as well as associated chemical treatment, testing and automated monitoring and control devices.

According to the Census Bureau, In FY03, government entities collected about $63 billion in water and sewer revenues, but spent nearly $76 billion on their water supply and sewer systems.

Consolidation

Despite a flurry of M&A deals in 2004 and 2005, the industry is still heavily fragmented. The key industry players can be segmented into the following categories: · Water utilities, · Filtration and UV, · Diversified industrial companies with a water flavor, · Infrastructure services, and · Wholesale water rights.

Some of the key players are: French water companies, Suez and Veolia
Environnement; Siemens Water Technologies; GE Water and Process Technologies; Aqua America; American States Water; California Water Service Group; Southwest
Water; German major - RWE AG; UK based Kelda Plc; Danaher; ITT Industries; Pentair; Calgon Carbon; Pall Corp; Zenon; Millipore; Asahi Kasei; Nalco
Holdings; Watts Water; Walter Industries; PICO Holdings; Cadiz Inc; and PureCycle

According to Bill Burmeister, co-founder of Global Safe Water, the industry is likely to see further consolidation with big players mopping up smaller operators. Some notable transactions in the past include: GE acquiring Ionics Inc for $1.1b; Siemens acquiring US Filter division of Veolia for $993m; Pentair, Inc. acquiring WICOR, Division of Wisconsin Energy for $850m; and Blackstone Group & Goldman Sachs Capital Partners acquiring Ondeo Nalco, div of Suez S.A. for $4.2b.

Besides Diaspora - Domestic confidence also matters

The Indian Diaspora is the largest in the world to-day after China and has roots in every country in the globe. According to Sunil Prasad, Economist with International Confederation of Free Trade Unions (ICFTU) and President of GOPIO-Belgium, the Chinese Diaspora numbers about 55 million and contributes almost 60 per cent of China’s total foreign direct investment, while Indians with 20 million contribute less than 10 per cent.

According to Sadananda Sahoo, Dept of Sociology University of Hyderabad, the Chinese Diaspora is dispersed in 136 other countries; but of all the Overseas Chinese, over half live in Southeast Asia. The Indian Diaspora is dispersed in 110 countries without concentrating on any particular region. Chinese emigrants fall into three distinct patterns i.e. indentured labour, free artisans and traders. They are a very diverse group of people, representing over 150 cultural and linguistic groups. These Chinese are largely Buddhist and Taoist, but represent the Christian, Islamic, and Jewish faiths as well. A majority of Indian immigrants belong to the class of the educated and professional elite such as engineers, scientists and college teachers as well as accountants and businessmen. However, recent emigration of the Indians to the West Asian countries is basically oriented to labor and servicing occupations on a contract basis. Indian immigrants are also a very diverse group of people representing different religion, ethnic, occupational and caste groups.

Chinese Diaspora's role in rural development in China is significant. The China Foundation, Inc. is a unique non-profit and charitable organization established in 1997. The mission of the Foundation is to raise funds for improving basic health services and elementary education programs in underdeveloped rural areas in China. In India, the Diaspora’s participation to rural development is confined to Punjab, Gujrat, Tamil Nadu, Andhra Pradesh, and Kerala.

Although the Indian Diaspora has miles to go to match their Chinese counterparts in fostering the economic development of their native country; India cannot just blame its Diaspora for showing lack of confidence. This is because, we have evidence to suggest that domestic Chinese population is doing a lot more than domestic Indian population to accelerate economic growth.

Consider the example of Chinese corporations who have listed their stocks in domestic capital markets and in Hong Kong stock exchange. All most all of these stocks enjoy premium valuation in domestic exchanges compared to multiples on the Hong Kong exchange – suggesting higher confidence and exuberance on the part of domestic Chinese investors, when compared to foreign investors who invest in Hong Kong. The magnitude of valuation differential was so high that Chinese regulators had to eventually intervene and allow for arbitrage trades between the exchanges in the hope of achieving price equilibrium. Despite the regulatory intervention; the valuation differential still persists – fueled by ever increasing appetite of domestic Chinese investors.

The opposite is true of Indian companies who have listed their stocks in domestic exchanges and in the US (via ADRs) and global capital markets (vis GDRs). All most all of these stocks trade at a discount in domestic exchanges compared to multiples attributed to their respective ADRs/GDRs – possibly suggesting lower confidence on the part of domestic Indian investors, when compared to foreign investors who invest in ADRs/GDRs of India Inc.

The higher confidence levels among domestic Chinese investors, relative to domestic Indian investors, could be another significant factor that will determine the difference in growth profiles of the two economies.

Fostering the Spirit of Entrepreneurship

While on a recent pleasure trip to my home country, India, I visited the new R&D centre of Google. What a facility – wow! This sprawling research centre houses about 150 of the brightest minds from across the world to further Google’s engineering capabilities. I met Phd’s who apply their expertise to launch consumer-relevant products and services. Most people I interacted with are geography-agnostic. All they care about is a place where they can work with like-minded thought leaders. Google has built a unique culture with its 80:20 philosophy to achieve effective human resource management. The engineers work independently – donning the hat of an entrepreneur; and each one of them is mandated to devote atleast 20% of project time on special/personal projects that are eventually brought to the market through Google’s global work-force collaboration. A classic example of the success of this amazing entrepreneurial culture is the launch of Google Finance. What started off as one of the 20’s project for three bright engineers at Google has become a case study for lean production in digital media. In the process, Google has dismissed the age old theory that mega corporations are less likely to be nimble and fleet footed, when it comes to breaking the shackles of organizational hierarchy and the associated bureaucracy. The company has successfully designed an organization structure that fosters innovation and the spirit of entrepreneurship. In addition, Google has overlaid efficient systems and process that ensure maximum yield and employee productivity. This visit to the Google campus has reinforced the thought that entrepreneurial instincts don’t just come by birth. It is not a genetic phenomenon. Rather, the spirit of entrepreneurship can be fostered by intelligent management practices – through an organization structure; systems & processes; and culture that is deliberately designed to achieve desired outcome – in this case, developing market leading products and services to sustain the competitive advantage. No wonder - not only leading head hunters are making cold calls to the Google R&D campus; but leading VCs (from around the world) are trying to lure these Google entrepreneurs in ‘Search’ of the next big thing!