By Steve Maxwell

Trying to describe the “water in-dustry” brings to mind the old fable in which three blind men try to describe an elephant and come to startlingly different conclusions. Individual perspectives on what the industry really is—and, hence, how big it is—are usually heavily influenced by what part of the business is being discussed and from what perspective one views it. Although the overall business is gradually consolidating and coalescing into more of a single industry, it’s still comprised of many different sectors. Today’s water industry might better be described as a market bazaar teeming with all different kinds of players, such as product and technology manufacturers, specialty chemical producers, measurement and monitoring firms, engineers and consultants of all stripes, service providers and system integrators. These companies have only one end goal—helping to provide clean water.

While observers of the water and wastewater “industry” may not be blind, they are confronted with a confusing array of fundamentally different individual businesses that are difficult to classify under any single heading. Although it’s hard to assess the size of this business, one thing is increasingly clear to all observers regardless of their vantage point on the water industry “elephant”—it’s a large and growing business whose true economic significance is only beginning to be realized.

How to measure the market?
A disparate industry like the water and wastewater treatment business is both a frustration and challenge to the market research analyst. When one has difficulty simply drawing the boundaries around an industry and adequately defining it, estimating market size and growth rates is clearly going to be difficult. Past attempts to size the overall water/wastewater marketplace have been fraught with highly variable assumptions, definitions and analytical techniques. A look at the range of industry revenue projections shows a variation of 300-400 percent, clearly suggesting that different people mean different things when they say “water industry.” More critically, lumping too many different sub-sectors together into a whole may mask critical trends and developments within the business. For example, a 5 percent overall industry growth rate may disguise the fact the one large and mature sector in decline is masking rapid innovation, economic vitality and explosive growth in another but perhaps smaller sector. This is, however, a coalescing industry and it’s important to try to look at the industry as a whole.

Because there are so many ways to analyze, slice and dice the water industry, it’s critical that market researchers are thorough and very clear about their assumptions when analyzing the current status and potential future growth of the industry. One of the industry standards in terms of market analysis and breakdown, and one of the most widely cited, is developed by Environmental Business International (EBI). For the last several years, EBI has conducted supply-side market estimates of the water industry, utilizing the service/product area or “supply-side” segmentation system as shown in Table 1.

Most other observers seem to agree that the U.S. market for overall water and wastewater services is somewhere in the $100 billion-a-year range, although some less thorough estimates have put a higher figure on the market.

Studies and approaches
Some studies have focused more specifically on the smaller and strictly “commercial” sub-sector of this market, i.e., revenue opportunities for private firms. This approach essentially ignores the vast but largely municipally controlled water and wastewater utility portions of the market which, as we have seen, make up over two-thirds of EBI’s estimated market total. As utilities increasingly seek private operators to run their businesses, however, this sector is gradually turning into more of a commercial opportunity as well.

The water and wastewater treatment industry has been bombarded with various studies over the past several years that have attempted to estimate the total infrastructure investments needed to keep the U.S. water and wastewater systems operable and compliant far into the future. This includes primarily the distribution and water transportation sub-sectors of Table 1—piping, valves, and accompanying services to install and maintain the overall water and sewer distribution infrastructures. Although assumptions behind these studies vary considerably, several are clustered around $300 billion—for both the water and the wastewater infrastructures—over the next 20-year period, or approximately $30 billion per year in terms of new infrastructure expenditures alone. (Although this may represent the estimated need, it remains considerably smaller than the actual current market demand for those particular services and products.)

Factoring in POU/POE
In terms of the retail point-of-use/point-of-entry (POU/POE) market, recent studies by firms such as Frost & Sullivan have generally estimated this sector of the business to account for around $800 million-$1 billion of annual revenue. Again, understanding the assumptions and industry definitions behind studies such as these are critical in terms of interpreting the results. These figures typically include sales of water conditioners, POU/POE residential and commercial treatment filtration and other products and devices, the accompanying chemicals, and other disposable products needed to keep them running.

Finally, no overview of the market is complete without a comment about the vast opportunities beyond the borders of the United States. While the domestic market is clearly one of the world’s most developed as well as the largest, many opportunities abound for water quality services firms in the rest of the world. Estimates for the size of the world market are at least three to four times the revenue volume of the U.S. market; McIlvaine Co. recently estimated the world market at $655 billion per year. Perhaps more critically, many of these geographic markets are at much earlier and more rapid stages of growth.

Finally, Table 2 shows current market statistics for the publicly traded firms, which we follow in this column. (Note the departure of Osmonics Inc., whose acquisition by GE Water Technologies was recently completed. Also note that Veolia Environnement is the new name of the Vivendi Environne-ment, parent company of USFilter and the largest water services firm in the world. The financial performance of many water companies is slightly down since our last review, although stock values have generally been up slightly, primarily as a result of the generally buoyant stock market. Hence, valuation multiples are slightly higher than last time).

Although different observers may have slightly different definitions of the water market and slightly different estimates of market size and growth rate, one thing is clear—the international water services industry is a huge and growing marketplace. As such, it should provide strong opportunities for well-managed companies far into the future.

About the author
Steve Maxwell is managing director of TechKNOWLEDGEy Strategic Group, a Boulder,Colo.-based management consultancy in mergers, acquisitions and strategic planning services to the water and environmental services business. Maxwell is also editor and publisher of The Environmental Benchmarker and Strategist, an industry newsletter covering competitive and financial developments in the broader environmental services industry. He can be reached at (303) 442-4800 or email: [email protected]


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