February 15, 2004
Companies Hope Profits Run From Clean Water
ILLIONS have been made by turning water into a designer product and putting it in attractive bottles aimed at the hip and health-conscious. But those who see money when they look at water are now far more intrigued by two areas of the business that are less sexy, but potentially far more lucrative: providing clean water for industrial and municipal use, and cleaning dirty water when that use is done.
Small wonder. According to Kerry Stirton, an analyst at Sanford C. Bernstein & Company, industrial water treatment alone is a $35 billion global market. When municipal treatment systems and other water processes are factored in, he said, water-related revenue may even top $100 billion.
In fact, demand for clean water continues to surge ahead of supply, particularly in developing nations. "Water scarcities still loom,'' said William J. Roe, the chief operating officer of the Nalco Company, which is based in Naperville, Ill., and is a big player in the water treatment business. "I don't think it's Orwellian to suggest that future wars may be fought over water instead of oil.''
Perhaps not surprisingly, the potential profits have attracted industrial behemoths. General Electric has been building up its water business even as it has played down other industrial lines. Pentair, a company based in Golden Valley, Minn., that had been putting equal emphasis on its lines of tools and water products, just announced that it would acquire Wicor Industries, another water products specialist, and would probably shed tools altogether.
"People think water is easy to relate to: you flush it; you shower in it; you drink it,'' said Andrew D. Seidel, the chief executive of USFilter, the water treatment company based in Palm Desert, Calif. "In fact, this is a complex business with 100,000 players providing all kinds of services and products.''
Indeed it is. Water companies provide the chemicals that purify water used to make computer chips - water too pure for ordinary humans' needs because it would leach calcium, zinc and other vital minerals out of the body. They sell the additives that keep factory pipes safe from corrosion when water cools them down or heats them up, and that make saltwater as sweet as liquid from freshwater streams.
They ensure that Coke or Starbucks coffee tastes pretty much the same, no matter where you order it. They enable refineries to turn cheap, highly acidic crude oil into high-grade gasoline. Lately, they are even helping hotels, hospitals and apartment buildings keep micro-organisms like the ones that cause Legionnaires' disease from circulating through plumbing and climate control systems.
"Auto companies want paint to stick. Power plants want to run boilers at higher pressure. Soda companies want global consistency. Everyone wants lower waste disposal costs," said George R. Oliver, vice president of GE Infrastructure Water Technologies. "Of course water is a growth business.''
If you still think the emphasis on water chemistry is overblown, confront the chamber of horrors on display in the lobby of GE Infrastructure's main water-research lab in Trevose, Pa. It holds a glassed-in graveyard of corroded pipes, split joints and other industrial casualties, all results of bad water flowing through manufacturing processes, cooling systems and the like.
In the bowels of the building, researchers are seeking ways to vaccinate industrial equipment against just such diseases. "We don't want to just amputate corroded joints; we want to prevent the gangrene,'' said Vivek Jain, a quality engineer.
The medical metaphor is no coincidence. G.E.'s water researchers are using imaging technology borrowed from GE Medical Systems to check water's impact on various pieces and parts. And they hope to use similar technology soon in remote monitoring systems that will diagnose a chemical imbalance in a customer's water stream or looming corrosion problems in its pipes, before the problems wreak havoc.
It is a chemistry business today, but remote monitoring is down the road, said Colin R. Sabol, general manager for global marketing at the G.E. water unit.
For now, the G.E. engineers have their hands full with the chemistry. In one room, researchers are torturing aluminum wheels, first scratching them, then confining them in high-humidity chambers for weeks at a time, then spraying them with solutions of copper acids and salt. The goal is to find new anticorrosion coatings that can halt environmentally caused damage without affecting the wheel's nice shine.
In another room, G.E. chemists are scrutinizing every step of making semiconductor chips. What sorts of acids, metals or other substances are in the baths that are used to make the chips smooth? What will be left in the wastewater afterward, and how should it be treated? "It's a moving target because customers keep changing their process formulations,'' said Stephen R. Vasconcellos, the engineer heading the project.
Down the hall, researchers are checking out anticorrosion additives that chemical plants, refineries, utilities and the like can use to keep pipes and vats intact. They are working, for example, with small quantities of phosphorus and similar substances that can bind with the calcium molecules that are present in most water to yield calcium compounds that inhibit the formation of rust. It is not as simple as it sounds. Copper-nickel alloys, carbon steel and other compounds that are efficient in transferring heat, and are thus necessary elements of many processing and climate-control systems, are also the first to corrode when water hits them. When they draw on water from municipal systems, a Catch-22 compounds the problem: that water is usually chlorinated, which cuts down on biological contamination but hastens the formation of rust. It is this same vulnerability to water damage that makes the pipe systems corrode in old homes long before the outer frames deteriorate. Galvanized steel could resist the corrosion, but it is much too expensive to use routinely in pipes.
"Water is not just a purity game; it's a cost game,'' explained Dr. Philip M. Rolchigo, the water unit's chief technology officer for the Americas.
FOR G.E., of course, it is first and foremost a profit game. In the spring of 2001, William A. Woodburn, then the head of GE Specialty Materials, was looking to add some pizazz to his unit's ho-hum business portfolio. So, he went to John Myers, the executive responsible for investing G.E.'s pension funds, and asked him which industry seemed primed for growth. The answer was sure and swift: "Water."
Before that year was out, Mr. Woodburn had bought Betz Dearborn, a giant in water treatment chemistry. In 2003, he bought Osmonics, which makes membranes for use in water treatment. Thus was GE Water Technologies born; it is now a $1.4 billion unit of GE Infrastructure. Mr. Woodburn, now the chief executive of GE Infrastructure, has never regretted his choice. "The need for pure water keeps growing, and so does this high-tech, high-service content business," he said.
Still, the industry does not gush profits. Water is a crowded field, populated by myriad niche companies. G.E. and Nalco, by far the biggest full-service players, command about 30 percent of the market. Water treatment technology is one of Dow Chemical's fastest-growing businesses, yet it is not among the most profitable. "Everyone is trying to develop a sustainable business model, but so many companies are muscling in that it's still hard to turn a profit in much of this industry,'' said Karen M. Dobson, global market manager for Filmtek, Dow Chemical's line of water purification membranes.
Acquisitions and divestitures have changed a lot of the company names without thinning the crowded field by much. Analysts expect that many more deals are in the offing. "The industry can support a fair number of niche players right now, but the field is ripe for more consolidation,'' said Mr. Stirton of Sanford C. Bernstein.
Whether profits keep flowing may yet depend on how successful the water companies are at selling high-margin services along with products - a revenue mix that has become the holy grail for many old-economy companies. Nalco, G.E. and USFilter have all offered to take over the management of entire water systems for customers, and each has had some takers, but not many. Customers, apparently, remain jittery about relinquishing control.
"I'd love to outsource all of our water needs, but I'd need some better guarantees of outstanding products and service before I'd be comfortable doing so,'' said Helmut F. Porkert, chief procurement officer at ChevronTexaco, which spends more than $100 million a year on water treatment chemicals. Several DaimlerChrysler assembly plants have put coolant suppliers in charge of their water systems. But Chrysler employees periodically check the water quality themselves. "It's our name on the line, it's our name on the discharge permit, and it won't be the chemical supplier who ends up with violations,'' said Neil P. McKay, senior manager of wastewater compliance for the Chrysler Group.
But while unequivocal votes of confidence are lacking, the water companies are slowly winning converts to their outsourcing approach. Ten years ago, PSEG Power, which uses treated wastewater to generate steam as well as to cool its systems, put USFilter in charge of water quality at its New Jersey plants; it may soon farm out the responsibility for water at its Connecticut and New York plants, and at plants it is building in Ohio and Indiana. Neil R. Brown, PSEG's manager of external affairs, knows that it is a big and risky step.
So why do it? "It's still the most efficient and cost-effective way," he said, "to employ the latest water technology.''