No. 107: Water business in Japan and the world (26) (October 29, 2011)

Growing competition between Japan and other countries

Japanese companies have great presence in the water treatment membrane business with a share of about 60% in the world market. The two leaders are Nitto Denko (32%) and Toray (27%). In recent years, however, Chinese companies chase Japanese companies at a rapid pace, underselling Japanese products by 30-50%. With the help of academic-industrial alliance, the Chinese government is facilitating domestic production of water treatment membranes. In view of the future growth in the Chinese market, Toray built a plant with a Chinese company on a joint venture basis in Beijing for the integrated mass production of reverse osmosis membranes with an investment of 7.5 billion yen. With the completion of this plant, Toray’s production capacity of reverse osmosis membranes increased to 1.5 times.

Korea is also chasing. It will invest about 19 billion yen between 2007 and 2012 to substantiate the state-of-the-art membrane treatment technology. Germany will subsidize the research on water treatment membrane with a huge investment. To cope successfully with these companies, Japan has already started projects to advance the membrane treatment technology to the next stage.

The Meta-ton Water System is participated by a total of 27 companies and universities including Toray and Tokyo University. This project aims to establish a seawater desalination system with a daily capacity of 10 million tons, two times bigger capacity of the current world’s largest seawater desalination plant in Algeria being constructed by Hyflux of Korea. With a subsidy of about 3 billion yen from the government, the Japanese project is trying to halve the desalination cost by dint of osmotic power that uses condenses seawater, a by-product of desalination. The research team is trying hard to establish a system that is highest in performance and lowest in desalination cost. The world water market is estimated at 86 trillion yen in 2025. The competition will grow intense continuously. (To be continued)     

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)

No. 105: Water business in Japan and the world (24) (October 24, 2011)

Future prospects of the Japanese water business

Japanese companies enjoy high technological excellence in such elementary technologies as membrane filtration and reverse osmosis membrane necessary to transform murky water and seawater for drinking water. The elementary technologies developed by Japanese companies are used in the water service projects worldwide. Nonetheless, few Japanese companies are involved in the management of water business. The following three approaches are recommendable to facilitate their involvement in the water business abroad: (1) investing in existing water business operators, (2) becoming a trustee company based on the concession method, and (3) participating in renovation projects of water facilities.

Japanese water business operators started to branch out into foreign countries lately with the initiative of big trading companies, but they are mostly not experienced enough to participate in the existing projects abroad on a concession basis. The same is true of local governments. That is why both private operators and local governments have few opportunities to get involved in water business abroad. Therefore, they are required to develop the ability to make a proposal for rationalization and streamlining from a viewpoint of a private company to a target country, while promoting the cooperation between the public and private sectors.

There are various problems inside Japan. Facing the huge demand for renovation of the existing facilities, water service operators have to pave the way for the joint management of the water business on a public and private partnership. And the central government is required to modify the legal system by facilitating the cross-sectional cooperation among government agencies. As described so far, the government initiative is vital to increase the competitive edge of Japanese companies. Otherwise, it is hardly possible for them to be entrusted with an integrated project that includes management and operation of the whole business in the global water market. (To be continued)

No. 104: Water business in Japan and the world (23) (October 22, 2011)

Japanese efforts are lacking in strategy

Japanese local governments with accumulated management know-how of the waterworks business dispatch engineers to developing countries and accept trainees from them, but they do not seem serious about promoting business through these efforts. The central government is involved in the development of water facilities in foreign countries though official development aid programs, but Japanese companies rarely participate in the management of the facilities. This is the reality caused by the lack of strategy. A water purification plant constructed in Cambodia as part of a Japanese ODA program was about to be sold to a foreign company in 2006, partly because the plant was too sophisticated for the local staffs to manage.

In foreign countries, Japanese companies are often not awarded a contract because the projects they offer need a high initial investment, even though their technology and competitive edge are evaluated highly. It is vital to provide both hardware and software for stable and secure water supply in foreign countries. Japan has to realize the importance of understanding the needs of a target country, having its competitive edge understood by the target government, and getting involved in the project from the very beginning to materialize business.

The Japanese government is discussing a new type of public-private partnership project with the Vietnamese government, in which the governments approve a project proposal submitted by a private company. Metawater submitted a proposal for the water project in Hanoi, and the project may be implemented as part of Japan’s ODA should it be approved. This system benefits Japanese companies whose technologies are not in a favorable position in a price competition.

As you have observed in this series articles, France and Great Britain excel in developing foreign markets in the water business. The key is the support from the central government. It is urgent for Japan to increase its presence in the world market with the support from the central government that includes sales activities of high-ranking government officials and submission of project proposals in the government-level negotiations, placing emphasis on the technological advantage and product differentiation. (To be continued)  

No. 103: Water business in Japan and the world (22) (October 21, 2011)

Government initiative in Singapore

Singapore is a small and flat country with a population of about five million. Because the country has difficulty securing water resources, it traditionally satisfied about 50% of its domestic water demand with raw water from Malaysia. When Malaysia raised the price of raw water in 2000, Singapore decided to increase the self-sufficiency rate of water and worked out various measures. To be specific, Singapore diversified the sources of raw water into four kinds: (1) water reservoir, (2) import from Malaysia, (3) reuse of sewage, and (4) seawater desalination. Ultimately, the country wishes to decrease the share of (2) and increase the self-sufficiency rate to 100%. Currently, it has five sewage treatment facilities, and they have a combined capacity to meet about 30% of the domestic water demand.

At the same time, Singapore promotes the policy to integrate world’s state-of-the-art water technology under the concept of the Global Hydrohub. Besides providing advanced research facilities and the place for substantiative experiments, the country is trying hard to establish networks of companies worldwide by developing human resources and organizing international conferences. Companies worldwide involved in the water business get together in Singapore and help Singapore companies acquire latest technology and know-how of the water business. PUB, Singapore’s national water agency, manages all water-related policies.

Korea shows the same trend. It started the “SEAHERO” project that aims to develop seawater desalination technology in 2006. With the background of the government support, Hyflux of Singapore and Doosan of Korea are now among top 10 of the world’s largest manufacturers of seawater desalination plants. (To be continued)   

No. 102: Water business in Japan and the world (21) (October 20, 2011)

Global expansion of Japanese companies

Because local governments manage most parts of the waterworks business in Japan, private companies have not accumulated enough management know-how and results in the water business. This is why general trading companies participated in projects abroad in alliance with proven foreign companies. For example, Mitsui & Co. and Sumitomo Corp. received an order for a large-scale waterworks project in Turkey in alliance with Themes Water of Great Britain in 1995. Likewise, Marubeni Corp. won a bid for a seawater desalination project in Mexico in alliance with a subsidiary of Suez Environment of France in 1997, and Mitsubishi Corp. obtained an order for a waterworks project in the Philippines with United Utilities of Great Britain in the same year.

Lately, however, Japanese companies have grown active and aggressive. Marubeni acquired a local waterworks company in Chile in 2006, and each of Mitsui & Co. and Toyo Engineering acquired a local company to participate in the waterworks business in Mexico in 2008. They are developing the business in these two countries independently of water majors. Japanese manufacturers show the same trend. Asahi Kasei producing membranes for sewage treatment and Kurita Water famous for its technology to produce ultrapure water are reportedly planning to expand the business to foreign countries including China.

You can also observe cross industrial moves. In April 2011, Ebara, Mitsubishi Corp., and JGC Corp. started to work together to promote the water business. The idea is to get a package contract from project development to maintenance in foreign countries with the power of Ebara’s know-how on water treatment, IGC’s engineering capability, and Mitsubishi’s global network. Subsequently, a group of Japanese companies acquired an Australian water business operator in May, and Bureau of Waterworks of Tokyo Metropolitan Government will extend technical assistance to the acquired company.

As described the above, Japanese companies started to grow active and aggressive, though they are a little bit late to realize the importance of the global market. They are growing more and more active rapidly in contrast to the slow move of the Japanese government. (To be continued)

No. 101: Water business in Japan and the world (20) (October 19, 2011)

Approaches of large western companies

In addition to the two French majors of Veolia and Suez Environment, GE of the U.S. and Siemens of Germany have great presence in the world water business. In particular, GE exerts lots of energy in the water business under the slogan of “Ecomagination” that makes environment and economy compatible for the problem-solving of the world. GE acquired water-related companies in succession to enter into the market and expanded the business scale quite rapidly. The companies acquired by GE include an American company producing reverse osmosis membranes, a Canadian company building seawater desalinization equipment, and a Canadian company producing ultrafiltration membranes.

A series of acquisitions allowed GE to increase its presence in the market and expand the scope of business. Especially, it focuses on the reverse osmosis membrane used for seawater desalination and the ultrafiltration membrane for the highly advanced sewage treatment called the membrane bioreactor method. As a result, GE is the world’s leading producer of membrane bioreactors at present. It is expanding the share in the world market in alliance with water majors and local companies around the world.

Like GE, Siemens of Germany entered into the market through company acquisitions. Siemens acquired an American filter producer in 2004 and put it as the core of its water business. Subsequently, it acquired several companies including water treatment companies in the U.S. and China and a sewage treatment company in Italy. It has been expanding the business rapidly placing the membrane technology at the center of its business.

IBM of the U.S. announced its plan to participate in the water business in 2009. Realizing that IT technology is not fully utilized in the water business, IBM wishes to build systems in the waterworks business with the help of IT technology. To be more specific, it plans to build a system that automatically monitors the amount and quality of water from water storage facilities to drainage pipes for efficient water supply using sensors and monitors. As is often the case, large companies participate in a promising and profitable business field through company acquisitions and make the competition even fiercer worldwide. (To be continued)