Earth may be the blue planet, but both growing population and climate change are creating freshwater scarcity in many geographies. Industrial activities come second only to agriculture in the use of water resources, responsible for 16% of global freshwater withdrawals. Industrial wastewater volumes are predicted to double by 2025, and there is increasingly strict regulation regarding treatment and reuse. This should create incentives for technologies and services, but changes to create or capture this value have been slow.
The expertise and capital cost needed to address large water treatment processes and services have led industrial companies to outsource their water treatment activities, creating opportunities for distributed or modular wastewater systems, treatment-as-a-service and the digitization of services. Corporates can play a key role by engaging with these innovators via investment and working with incubators and accelerators to develop more efficient and profitable industrial water services.
Each of the industries producing wastewater has their own unique treatment demands, locations and outcomes, which creates challenges in scaling innovation to address multiple needs. This has led to market fragmentation, where no single corporation has more than 5% market share of the $100 billion industrial water industry.
We spoke to Chris Morrison, Assistant VP for Water Technology Partnerships at Ecolab, about regional differentiation for industrial water pricing, another challenge for scaling innovative technologies. In the United States, industrial customers pay between $3-$4 per 1,000 gallons for source water, compared to $20-$25 per 1,000 gallons by the same types of customers in Germany or Switzerland. Many different technologies are needed to treat the various industrial wastewater types, and there is also significant geographic differentiation in terms of what customers are willing to pay for, furthering the fragmented spread of customer needs.
Dr. Reinhard Hübner, Investment Manager at SKion GmbH, pointed to the different geographic needs and the differing industrial practices within each region. For example, oil & gas industrial water needs remain high in the US, leading to a focus on modular, compact and transportable treatment units. On the other hand, there is less building of new industrial water treatment plants in the US and Europe, with a higher focus on optimization of existing capabilities. In Asia, there is more building out of new infrastructure, especially for the food & beverage and construction & demolition waste industries.
The time horizon on projects is also an important regional differentiator. In the US and Europe, years often pass between the first conversation and the implementation of water treatment systems. Ari Raivetz, CEO of Organica Water, cited a 6-7 year sales process in the US, compared to 18-24 months in China. Ari estimates that 80% of projects in China are run by a single company that finances, builds, owns and operates a plant. This company will then be focused on the CAPEX returns of these facilities, as well as the OPEX reductions, incentivizing the integration of innovative new technologies.
Where does this leave the corporates…
One approach is creating a larger platform. Market leaders are actively looking to establish positions and scale via mergers with rivals. Ecolab is currently the market leader with around $3.8 billion revenue in industrial water, following its $5.4 billion acquisition of Nalco in 2011. SUEZ made a similar move in October 2017 via its acquisition of GE Water & Process Technologies, helping SUEZ scale up its industrial water market revenue to $2.7 billion, which it expects to grow to $3.1 billion by 2020. Xylem’s acquisition of Pure Technologies for $397 million in December 2017 followed suit, as have other corporate M&A, including Emefcy/RWL becoming Fluence and Kurita acquiring Fremont Industries.
A second approach is investing in startups, where industrial corporates can leverage their deep knowledge of the sector, and where other investors have historically struggled to make successful exits. In recent years, generalist and cleantech investors have retreated from water investment. As Dave Henderson of XPV Water Partners tells us, “To make competitive returns in water, it does take a certain level of expertise to navigate the sector’s complexities.”
This vacuum creates an opportunity for corporates to invest in innovative water startups via investment and acquisition, in an area of venture where valuations are much less inflated compared to overheated ‘zeitgeist’ innovation areas.
Corporate support for growth-stage water startups can be crucial in helping them cross the ‘valley of death’ into commercialization. As an example, Dow Chemical and Saudi Aramco have both invested in OxyMem as strategic partners, providing capital and contacts within adjacent markets, such as chemicals and oil & gas. This type of strategic relationship also allows corporates to gain a deeper understanding of the innovator’s technology, how it applies to their business, and the dynamics of areas in the value chain where there is less institutional knowledge – both Dow and Saudi Aramco will gain insights into industrial water market dynamics through working with OxyMem.
Due to the risk aversion in water markets, corporates in this sector are behind on adopting enabling technologies compared to incumbents in more innovation-minded sectors. For example, lacking the large internal R&D budgets of leaders in other sectors, water incumbents have looked to integrate digital water technologies via investment and acquisition. In this year alone, we have seen four significant digital acquisitions by leading water corporates. SUEZ invested in Optimatics before acquiring the startup in October 2018, ETwater was acquired by Jain Irrigation in September 2018, EmNet by Xylem in February, and Fracta was acquired by Kurita in June 2018. Even SUEZ’s acquisition of GE’s water business was in part an acquisition focused on GE’s water data and analytics management platform “InSight.”
Engaging with earlier stage innovation is hard for large corporates, but by developing relationships with incubators and accelerators they can gain access to a strong pipeline of developmental technologies. Imagine H2O, a US-based, water-focused accelerator, points to the 181 applications they received for this year’s cohort – a near doubling of the volume the previous year – as evidence of a strong innovation pipeline. The group, founded in 2008, expects to surpass 250 applications for its next cycle. This healthy innovation pipeline has led to Imagine H2O working strategically with several water corporates, including SUEZ, TetraTech, American Water, Sembcorp, CITIC Envirotech and Kurita.
In exchange for providing support to incubator and accelerator programs, corporates can develop relationships with startups that lead to investment as technologies mature. With the example of Imagine H2O, Kurita has invested in two portfolio companies focused on digital solutions – Apana in January 2017, and $37 million invested into Fracta, an AI-focused water startup. Tencent has also invested in two other Imagine H2O cohort AI companies, and Xylem acquired Valor Water Analytics from the 2015 cohort.