14 August 2020

Columnist:

Christopher Gasson

Can water technology companies have it all?

The world of water, through the eyes of GWI publisher Christopher Gasson.

This week I interviewed Evoqua CEO Ron Keating for GWI magazine. The news angle was that the company has turned out to be one of the best performers during the COVID-19 outbreak, with like-for-like revenues down just 0.5%, and EBITDA up 5.3% to $63.8 million. The share price is up more than 160% from its low point in March.

Much of the success is down to the company’s strategy of building its digitally enhanced service offering (Water One) while maximising repeat revenues from replacement parts, and acquiring expertise in industrial market niches to broaden the platform. It is interesting to look at this strategy in the context of what other players in the market are doing:

DuPont: The money is in market-leading products with large aftersales markets. Growth comes from building out the portfolio and moving into the solutions business inasmuch as it is possible to acquire intellectual property without upsetting the systems integrators who are DuPont’s main customers.

Suez WTS: The money is in exclusive technologies and service contracts. The growth comes from taking a greater share of the value chain, either through buying technologies or developing digital service offerings.

Veolia Water Technologies: The money is in long-term relationships with major global industrial water users. Growth comes from acquiring new clients and meeting their needs.

Ecolab: The money comes from service contracts which are always renewed. Growth comes from digital offerings which reduce costs while delivering more value to customers.

Danaher: The money comes from high-value niche products. Growth comes from mining these niche markets through a decentralised management structure, and looking for opportunities to operate remotely.

Kurita: The money is in long-term contracts which combine all aspects of water management for industrial users with complex needs. The growth is in expanding the concept into new geographies.

The spectrum of companies ranges from DuPont – which is probably the most technology-focused – via Danaher, Suez, Kurita, Evoqua, and Veolia, through to Ecolab, which is probably the most customer-solution focused. The trend, however, is very much towards an increased focus on customer solutions. That is because the biggest opportunity in the business is in digital outsourcing. You can’t have a digital offering if there is a systems integrator standing between you and your customers.

Over the next five years, this will change the structure of the industry. Historically, the logic was that technology companies made their money from economies of scale, while systems integrators made their money from project margins. The former strategy involved finding ways of selling an innovation globally into as many different applications as possible, whereas the latter involved a much narrower focus on customer needs. The thing about digital services is that they are both a technology which benefits from economies of scale, and something which can only be delivered if you have a direct relationship with end-users.

That points to a world where there is no space for small stand-alone systems integrators or technology companies which have no end-user customers. Consolidation is going to be the answer.

I think quite soon we will begin to see who the winners and losers will be, but don’t count on all of the big seven making the transition. Others like Xylem, Grundfos, Nijhuis (Saur), Ovivo and Waterleau are also eyeing this market.

The interview with Ron Keating will be featured in the August issue of GWI magazine, due to be published on 20 August.