The growth current of the water quality engineering market remained strong in 2003, growing at 11% to $4.5 billion. This growth rate equals the average annual growth rate over the previous five years. In 2002, that rate was estimated at nine percent.
One niche market that seems to be growing at a faster rate than the overall market is water resources management. It is a diverse segment requiring diverse talents. This market needs more than engineers; it needs biologists, planners, economists, modelers, and hydrologists. Ecosystem restoration projects provide very significant opportunities in this segment. For example, the prolonged drought in the west is compelling a need for planning and innovative thinking in husbanding a scarce resource that must serve a rapidly growing population.
Within the water-quality engineering sector, design-build continues to gain ground as a method of project delivery. Although the trend has slowed somewhat, it reflects the normal ebb and flow of design-build construction cycles. The design-build tide is rising and qualifications-based contracting is complicating new entry for those engineering firms that believe they have the construction management talent to serve as primes on design-build projects. However, engineers that are aligning with regional constructors are joining the fray, and they can be potent competitors.
In contract operations, the phenomenal U.S. growth of the past 10 years came to an abrupt halt in 2003, reflecting uncertainty among competitors with the operations and maintenance business model.
The $1.5 billion contract operations market grew by only 2% in 2003, down from 18% in 2002. The local government side of the market slowed to a trickle, increasing just 1% in 2003, after increasing approximately 17% in 2002, while the industrial market grew just 4% last year after a 20% increase in 2002. Veolia Water North America, formerly USFilter, has a staggering share of both sides of this market dominating 80% on the industrial side and 44% on the government side.
Observers saw in 2003 and 2004 a rethinking of strategy, rather than a quest for market share. During the late 1990s and into 2001, the sector had seen some cutthroat pricing and acceptance of some unreasonable terms and conditions in contracts.
Today, competitors are sobered by some costly bad contracts and by poor profitability. The advent of longer-term contracts, beginning with the IRS ruling in 1997, made subtle but important changes in the business model and the competitors have been slow to fully understand those changes. Chief among those changes is the fact that the risks of a 20-year bad contract are substantially greater than those of a three-to-five year bad contract.
A new look
Taking stock of the situation and looking afresh at the basic business model, major players are scaling back their business-development efforts. That alone can explain the market slowdown in 2003. Municipal officials are unlikely to conclude that they need to enter into public-private partnerships and pursue those partnerships unless the private sector actively convinces them of the advantages.
The near-term contract operations market growth is unlikely. However, with less competitive intensity, the industry could see better pricing, more reasonable terms and conditions, and more reasonable expectations on the part of municipal officials, providing pillars for future growth.
In the water treatment equipment sector, the assets are undergoing a major repositioning with the advent of new market entrants like General Electric and most recently, Siemens. When the largest equipment provider—a unit of USFilter—was up for sale, it attracted significant interest among financial and strategic buyers, with Siemens being the bidder that prevailed.
That interest was due in large measure to GE’s entry into the marketplace. GE has signaled that they are going to go after industrial outsourcing as well.
The water equipment market is growing, but the profits are thin. Unless you have a confluence between a regulatory imperative and a proprietary technology, it may be difficult to make a lot of money in this marketplace.
Meanwhile, some analysts are anticipating further consolidation, but so far economies of scale and scope have proved to be elusive.
RSS: WWD Articles
.gif)
