The water industry is experiencing strong growth, as reflected in the stock performance within the sector. Two areas gaining significant attention are: point of use/point of entry (POU/POE) systems and waste water treatment due to problems with scarcity and quality. How do companies involved in this arena see their future? In addition, over the past several years, the industry has undergone considerable consolidation and acquisition, a trend that is believed to continue. How will this impact the development of the water market?

Water Shortage
Of a population of roughly 6.1 billion, more than 1 billion lack access to potable water. This situation is expected to get much worse in the future. Countries and firms are actively looking for alternative solutions to address this problem. Point of use/point of entry systems and waste water recycling are two of the most popular solutions.

Figure 1: Quoted from www.epa.gov/ord

Point of Use/ Point of Entry Systems:
Both POU and POE devices purify water coming from the distribution system to a home or facility. POU purifies water to a desired level at the tap to which it is connected, while POE is one single device which purifies all the water coming into the building.
As water prices increase, people start to pay more attention to the quality of the water they are getting. Therefore, with more publicity and awareness on the issue, POU/POE, which is said to be a cheaper way to insure the quality of water than other alternatives (e.g. bottled water), starts to attract more and more attention from both industrial and residential users.


Hendrx Corp (OTCBB: HDRX), a manufacturer of water purification technology, is addressing the water quality issue by providing highly purified drinking water for both residential and industrial markets. Hendrx CEO Robert De Costa said, ”We at Hendrx believe strongly that POU systems will gain in significance providing pure drinking water for the future. The water / sewage infrastructure worldwide is in need of massive repair and there simply is not enough money to properly fix these systems. In the United States alone we’re talking about hundreds of Billions of dollars and this estimate goes up dramatically every year. We’re also learning that currently used water treatment methods like chlorination may not be as safe as we once thought. Any time you introduce an additive or cleanser to the water we drink, there’s the possibility of short term and long term complications. Today’s consumer is becoming increasingly health conscious and they know that proper hydration is a major factor in maintaining a health life style. For all of these reasons we think that micro-water systems, POU systems will play an ever increasing roll in the supply of personal drinking water.

Hendrx is in a unique position since we are the leading manufacturer of Atmospheric Water Generators (AWGs). These devices collect pure water from the naturally occurring moisture in the atmosphere. Once you get an AWG, the only thing you need is the proper temperature, humidity and power to run the machine. Although atmospheric water devices will not work everywhere, we’re very positive about the future of AWGs in many regions of the globe.”

Brita water filtration system is a POU product as well. According to the Clorox Company (NYSE: CLX), Brita® water-filtration systems remove 98% of the lead from tap water. In addition, Brita systems reduce chlorine (both taste and odor).

Neil D. Berlant, First Vice President and Managing Director for The Water Group, The Seidler Companies, comments,” One of the major difficulties, in addressing water quality, is that even when water utilities do a terrific job in purifying it, once it leaves the central treatment facility, it conceivably passes through dilapidated pipe systems, and it might take up harmful chemicals along the way, so the water you get at home could be considerately different than the water leaving the central treatment facility. The only effective means of assuring good quality water when you use it will be to treat it at the point at which it will be used. Also, it is much cheaper to treat water at the point of use versus, the cost of repairing the pipes and infrastructure to guarantee the water quality from the central treatment plant. “

Steve Maxwell, Managing Director at TechKNOWLEDGEy Strategic Group has a similar opinion, “Some people in the industry argue that we concentrate too heavily, and spend too much, at the centralized treatment plant. Some argue that perhaps it makes more sense to distribute water from a central plant with lower quality to later be treated to the level needed at home or at the tap, instead of treating 100% of all the distributed water to a high degree of purity at central facility,; after all, we only drink 0.5 to 1% of the water. From a broader economic point of view, it might be cheaper to treat the water at the point of use. The big drawback is that this would require a rebuilding of the whole water infrastructure, but it might be cheaper in the long term.”

Driving factors and obstacles in POU sector

With increased visibility for the water quality issue, the rising price for water, and the growing demands from developing worlds, POU/POE solutions have become very popular as they offer cheaper means (comparing to bottled water) of guaranteeing water quality. However, high setup costs and negative feedback from water utilities are holding back its development.

As Maxwell explains, “High set up costs might be one of the reasons hindering the development, although the argument is it might be cheaper long term from a broad economic point of view. On the other hand, growing awareness of water quality issues and concerns about quality in the distribution system is a big driver. More importantly, this technology has an even brighter future in parts of the developing world, because many developing countries do not yet have a system of large central treatment plants. Instead of building such large centralized facilities, we may see some countries jump directly to building a distribution infrastructure with a lower level central treatment plant, and with people utilizing point of entry devices or bottled water for their drinking purposes , thus avoiding the construction of very large and very expensive central plants. “

Berlant also thinks,” One of the major driving factors is more visibility about the quality issue. It’s in the paper and on TV all the time. The second part is; as water is beginning to cost more, people are becoming more concerned about the quality of the product they are buying. The third factor is; if you contrast having a point of use system at home versus buying bottled water, POU should be a lot cheaper. On the other hand, water utilities have been slow to address the issue. They tend to be very defensive about what they do. They say: we use the best technologies to give you best quality of water, so buying bottled water or POU is just wasting your money. Among the reasons for utilities to adopt POU are: first of all, public continues to pressure the utilities to make sure the water quality at home is better; the second reason, which is much more fundamental, is, utilities could conceivably offer POU on a sale or rental basis to their customers and that would mean adding additional revenues and profit. All in all, I believe POU systems are going to be huge. “


Waste water recycling
As water becomes scarce and water resources become more valuable, there is an economic, as well as a social incentive to better manage and treat the waste water so that it can become a primary source of water.

Bjorn.von.Euler, Director of Corporation Communications at ITT Industries Inc. (NYSE: ITT), states,” We provide total solutions for the global water and waste water market. We transfer the waste water to treatment plant and use various technologies to treat and disinfect the waste water for industrial, agricultural, or consumption reuse. Reuse is by far one of the most important technologies that we can use today to take care of the water and make sure we are using the water in a responsible way. Reusing is good for both municipal use and industrial use. This market definitely will be much bigger as water is getting scarcer. “

Global brand manager for Siemens Water Technologies, a subsidiary of Siemens AG (NYSE: SI), Lisa Sorgini said: “Wastewater recycling allows communities to solve water shortage problems in two ways. With the use of membrane filtration, wastewater effluent can be treated to high quality standards for urban uses, such as irrigation. This recycled water reduces the demand on potable water for non-potable uses. Membrane filtration can also treat wastewater to potable water standards. This direct reuse method is vital to many areas with dwindling water supplies and a less expensive solution than desalination. Siemens Water Technologies has numerous microfiltration/ reverse osmosis facilities located all over the world used in both indirect and direct treatment modes.”

Driving factors and obstacles in Waste Water Treatment sector

Several factors are driving the fast growth within this sector: water prices are increasing quickly; more technologies have become available and there is higher regulation pressure. How the concept of direct reuse of waste water will be accepted socially is a major challenge that this sector must overcome to continue its development.

“What drives the growth is the new technologies and the more economical solutions that we can provide today coupled with higher legislative demands on purity,” said Von Euler, “Also, the technologies needed cost less and are more energy efficient resulting in a lower life cycle cost. More and more industries are treating their own waste water before discharging it into the municipal system. If you now reuse your treated water – you lower your costs further. Also, costs of producing water are increasing, and reuse is a way to avoid those costs. On the other hand, factors hindering its global development are the investment and energy needed and infrastructure. Many areas around the world do not have the dependable access to electricity nor the necessary distributions systems. Small and micro scale solutions may be solutions in such areas. To go from toilet to tap is possible and done. Smart design solutions and education are needed.

Maxwell comments,” Today there is a growing pressure to treat waste water to a much higher standard, so that it can be essentially reused as a source of primary water again. Indirect reuse is getting much more common on an industrial level. However, even though direct reuse of waste water is technologically very feasible, it remains socially unacceptable. Particularly, on a residential system, if you think of taking the water that runs through your toilet , treat it in a little black box outside of your house and have it come back into your tap, it is a very scary idea to most people. Actually, waste water is not harder or more expensive to purify than other types of source water -- it is purely a perception issue, not a technological problem.”

Sorgini also says, “Public perception can be a hindrance. Many consumers have yet to accept the ability of membrane filtration to remove biological contaminants and turn wastewater into a high-grade drinking water source. For this reason, it's important to raise community awareness and get community buy-in.”

Berlant however, thinks the focus should be on industry use, rather than residential,” Residents do not use that much water and do not generate that much waste water. The significant issue is, if you are a manufacturer, and you use a great deal of water (compared to residential users) for your manufacturing processes, then you need to do a lot of treatment before you use it, and then before you let the water go down the drain. First, as the price goes up, it makes more sense to treat the water and reuse it again. Second, the regulation pressure is rising to make the waste water cleaner and cleaner. The penalty is becoming more severe if you fail to do it properly.”

Acquisition
Over the past several years, the water industry worldwide has being going through a dramatic rearrangement of ownership and increasing acquisition and consolidation, as companies strategically position themselves to exploit the opportunities in this fast growing market.

Berlant explains,” There are usually two types of acquisitions: Companies not in the water sector acquiring companies in the water business in order to get into the industry; there are also water companies focusing on different areas combining to provide a more complete integrated service. There is a combination of reasons for this phenomenon: water is certainly being viewed as a growth area. More and more people recognize the fact that these are very attractively valued and attractive growth vehicles. It is easier to get into the business by acquiring companies already in the business and add into what you are doing than it is trying to create your own.

Secondly, there is a growing awareness that a more integrated company offering all things water related is a substantial advantage over a single line company. This is creating the emphasis for water companies to merge or acquire other companies, not only in the same water sectors, but in different areas as well. Therefore, companies that are growing very large by acquiring other companies are doing so by trying to pick up the pieces to make up a complete system.

Maxwell also agrees, “There are two main drivers behind this phenomenon. One is that there has been much publicity and interest about where the water industry is heading and the industry is offering great opportunity for growth and profitability in the future, so there are a lot of firms interested in acquiring a share in the industry, positioning themselves to participate in this opportunity in the future. Second, it is still a very fragmented business, so there is natural tendency towards consolidation and small companies binding together to become bigger to be more competitive. “
 

Quoted from: “The State of the Water Industry, 2005” by Steve Maxwell

Water Market Future Potential
Both experts think the water industry is very promising. Maxwell states, “Generally speaking, I think we have a business that will continue to grow and offer great potential for firms into the very long term future. From a global point of view, we have a growing demand for water with a fixed supply, but we have a rapidly growing population and rapidly expanding economy. Meanwhile, we have the issue of poor water management practices. So all of these combine to suggest that water resource and availability of drinking water in the future is going to be a bigger and bigger challenge and problem. Firms that are involved in this kind of business solving these problems have very bright future. So it is a very good industry to be involved in long term. Most sectors of this industry do not offer spectacular growth or profitability, but I think there is a very sustainable basis for long-term growth and profitability.
Similar opinion is expressed by Berlant, “I think water will be increasingly precious, I think the need and desire of customers for water treatment, and desire to have better quality water is just at the emerging stages. And I think the economics and pricing are going to make this an extraordinary market. It has been an excellent place to be for a long period of time. Although up until recently, it has been largely an invisible area. People never thought about water particularly. It is the most important element in our life. Partially because it has been so inexpensive, that’s why people don’t think about it that much.”

Fei Wang

Fei Wang holds an Honors Bachelor of Commerce from University of British Columbia Sauder Business School, with double major in Finance and Marketing. She has experience in investment banking and advertising in Canada, China and Korea, with a firm academic background.

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