The impression I get from reading various reports out of China is that there is a crucial time window between now and 2020 to get solutions in place and make a difference to the river environment. There is also a call for standardization to get this done. So if a partner like Jinzi or iTEST commit now to start installing MABR solutions and it performs, they are not going to switch to a new technology later down the track. Meeting Class 1A standards reliably, at low energy usage and at a competitive price are the selling points.
It seems to me that the process of copying would take at least a couple years. If MABR spirals were to be copied by a partner, to get into full production would take a minimum of 12 months. (It takes Fluence 6-9 months to get a new production line up, already having full knowledge of all the processes involved and established staff/factory). But is it the spirals themselves that are important, or is it the mix of bacteria that form the biofilm on the spirals that is important, and the method of controlling this biofilm production (and chemical dosing to regulate water quality in thee treatment cycle) where all the ip lies? Then they would have to find suppliers for each piece of equipment that goes into the containerized solution and treatment train. It is likely that they would substitute in lower cost parts for this too. Then they have to engineer it all together, and make sure that each part they have substituted in works the same as the original. Then they have to ensure that within this treatment system, the MABR spirals produce the same type of biofilm to reliably treat the water to Class 1A. These systems are going into decentralized solutions, without full time staff, so if any part of the system fails, you end up with big issues. Then there is ensuring the whole process uses as little energy as possible (substitute in a lower quality pump, energy usage goes up). There would be a multitude of pressure points that could fail in a system like this. Which is why Emefcy needed to partner with the expertise of RWL Water in the first place. If it was easy to do, then Emefcy would have containerized the solution themselves.
The partners that Fluence are dealing with are relatively localized to 1 to 4 provinces. So even if a Jinzi was to copy MABR spirals, it may affect the opportunities Fluence has in 1 to 4 provinces, but not the rest of China.
It would seem easier for a Jinzi to just treat Fluence as a parts supplier for MABR spirals if they wanted to substitute in the other equipment and go through that process themselves. Except that is the business model that Emefcy originally touted in China, and which Henry has since admitted that no partner was interested in. For their partners to maximize their opportunities, they want to buy a well-engineered product off the shelf, and concentrate on building out as many sites as possible, with a standardized design where as little can go wrong as possible.
Also, the whole point of copying a product in China is to get the efficiencies that come with producing a high quantity of something at a consistent rate. Fluence also has their factory in China, so you don't get a wage efficiency, the only efficiency would come from being able to produce a higher number of spirals than Fluence can at a cheaper price. Except Fluence has 23 current (potential) partners, and a SOE like Jinzi only has their own opportunity base, plus the headaches outlined above in copying and substituting in parts for their systems. If Jinzi were to copy and a plant failed through a manufacturing error, Jinzi has to wear the cost of replacement. If Jinzi partners with Fluence and a plant fails through a manufacturing error, Jinzi blames Fluence and Fluence wears the costs of replacement. You would think that Fluence would be able to produce and sell MABR units at a more consistent pace with multiple partners (especially once SUBRE is selling) than a single SoE.
Also if copying were to take place at a large scale, that would in some ways prove that MABR has a large opportunity in China, would prove out their business model and there would likely be a market for them anyway. And is the China opportunity even about ultimate business success in China, or about building up a short term sustainable business base so that we can proliferate MABR and SUBRE to the RoW?
FLC Price at posting:
42.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
