Monday, October 24, 2011

No. 106: Water business in Japan and the world (25)

Decreased share of the four water majors
The combined share of the world four water majors decreased from 60% to 30% in the past eight years. In the suburbs of Oran, the second largest city in Algeria, a desalination plant with the world’s largest daily desalination capacity of 500,000 tons is nearing completion. It is Hyflux of Singapore that concluded the package contract of this plant. Founded in 1989, Hyflux is a Singapore’s national policy concern. The Singapore government placed orders for the construction of advanced water treatment plants with this company to let them accumulate experiences. With the accumulated results, Hyflux developed the global market, and 90% of its sales come from the Middle East and China.

K-Water of Korea is chasing Hyflux of Singapore. In 2007, Korea claimed that Korea would place more than two companies in the list world’s largest 10 water companies. Korea actively assists K-Water with their efforts to cultivate the global market. In contrast to these two governments, the Japanese government is awfully slow placing too much emphasis on domestic issues. To make up for the slowness of the central government, local governments are very active in the efforts to develop foreign markets.

Yokohama Water is a good example. Yokohama invested 100 million yen to found this public utility. The background of the foundation can be seen in many local governments across the country. Yokohama has water pipes that have a total length of 2,900 km, part of which has already pass the legal useful life of 40 years, meaning that a huge investment is required for renovation. On the other hand, with the progress of water saving technology, city’s revenue from water charges decreased more than 4 billion yen to 74.6 billion yen in 2008, meaning that unless a new revenue source is created, there will be no way to increase water charges. Tokyo drives its officials to develop the global market, placing emphasis on Tokyo’s excellent technology to keep the rate of water leakage at merely 3%. The rate of water leakage is usually 10-20% in advanced countries and nearly 50% in developing countries.

However, what is an urgent task is to build a business model that can utilize economies of scale. In Japan, there are about 8,000 public water business operators, and local governments manage these operators. That is, they are highly segmentalized. In addition, 80% of them are operators for simple waterworks covering a population less than 5,000. Form the business viewpoint, an operator needs to cover more than 30,000 people to be profitable. A drastic reform that takes privatization into consideration is vital to increase the competitive edge of the Japanese water business. (To be continued)

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