Issue Date: May 11, 2009
Cash Flows From China's Water
AT THIS POINT in the world's economic cycle, few businesses can offer immense growth opportunities, in either the short or long term. Providing water treatment products and services to China, however, is an exception. Major Western companies expect no drop in Chinese demand this year—or at any point in the future.
"It will take 20 years for China to build all of the water treatment plants that the country knows it needs to implement," says Gérard Mouchiroud, general manager for Chinese operations at France's SNF, the world's number one producer of contaminant-removing flocculants. "In water, China is the world's most dynamic market for SNF," he notes. Mouchiroud expects that SNF's flocculant sales in China this year will grow by 20%, just about the same rate of growth the company experienced in that country in years past.
Chinese banks and local governments will together provide as much as $45 billion in funding for new water treatment facilities through 2011, Mouchiroud says. China's central government will dish out an additional $13 billion during the same period for plants that process wastewater or provide water suitable for drinking. "All cities and industries are theoretically obliged to treat their wastewater, although in practice, for the cities, it really depends on how strong their finances are," he says.
China has a lot of water that needs to be treated. Between 200 million and 300 million people throughout the Chinese countryside do not have access to a safe source of water. They get their water from shallow wells and rivers that the country's ongoing industrialization has often rendered unsafe. In some villages, peasants have started to build their own water treatment systems. Many rivers in China have become so polluted that their water isn't even suitable to irrigate land.
The country's northern part, which includes major cities of 5 million to 15 million people, such as Beijing, Tianjin, Harbin, and Shenyang, is facing water shortages. "Urban, industrial, and agricultural development in the northern China plain is increasingly restricted by the shortages of water," stated a 2007 report on China's environmental performance by the Organization for Economic Development & Cooperation.
This growing need for clean water as China gets richer is a huge opportunity for companies in the water-processing field. To take advantage of growth in China, international companies have established an impressive business infrastructure there. All major players have world-class technical centers in China to help them serve a wide variety of customers.
N. T. Yuen, Dow Chemical's Asia-Pacific marketing manager for reverse-osmosis and nanofiltration membranes, says Dow's Shanghai R&D center for water is probably better equipped than the one the company runs in the U.S. He says this is largely because the center, which has been open since March, is fitted with newer instrumentation. Nanofiltration membranes have pore sizes in the nanometer range through which water is pushed. Some salts and mineral-based hardness remain in nanofiltered water. In reverse osmosis, water is pushed through a semipermeable membrane to remove salts.
Likewise, Zhou Weifang, president of General Electric Water & Process Technologies in the China region, says GE has invested a lot in its water business in China, although he won't provide numbers.
GE opened a chemical plant in the industrial city of Wuxi, near Shanghai, in November. In Shanghai alone, GE operates a total of five water research labs at the GE China Technology Center in the Zhangjiang Hi-Tech Park. And last year, GE made a gift to Hebei province of two water treatment plants capable of producing drinking water for 60,000 people per day. One plant is a mobile unit that can travel from village to village.
Ubiquitous billboards advertising GE's water business in airports in China are another illustration of the importance GE attaches to its China business. The company offers a range of equipment and chemicals addressing needs that are often unique to the country, Zhou says.
GE's water treatment sales in China are divided about evenly between chemicals and equipment. The chemicals perform a range of functions, such as clarifying water before it is rendered potable and helping prevent corrosion inside boilers. The equipment includes reverse-osmosis membranes and membrane bioreactors.
"There's a great need for water in China," Zhou says. "The water resources per capita are only one-fifth what they are in the U.S., while at the same time the economy is growing a whole lot faster."
Although the looming water shortage in the north represents an immense opportunity for water treatment companies, the region is only a small part of the Chinese market. Even in wetter parts of China, industry needs to purify water that will go into boilers and other sensitive process equipment. Wastewater also needs to be treated before it is released into the environment. Industries such as power generation, refining, chemicals, paper, food, and pharmaceuticals are for now the biggest users of water treatment products and equipment.
THE POWER INDUSTRY is a particularly major user of water. According to GE's Zhou, about one-fifth of China's water is consumed by industry, and 45% of that is used for power generation. China derives most of its electricity from coal-fired power plants, although other sources of energy are gaining in importance. In April, the China Atomic Energy Authority reported that 24 nuclear power plants are under construction in the country.
Along with semiconductor manufacturing, power generation requires the cleanest water. Kenneth W. Lam, managing director of Toray Industries' China subsidiary, Toray Membrane Beijing, tells C&EN that impurities going into turbines and high-pressure boilers can lead to catastrophic equipment failure. "You can't have deposits in there; they could unbalance a turbine, and it could blow up," Lam says. Toray's reverse-osmosis membranes demineralize the water going into a power plant.
Other than their operational needs for clean water, Lam points out, industrial companies also face regulatory pressure to clean up their water before releasing it in the environment. Increasingly, he says, chemical producers and steel mills are recycling their wastewater, often making use of membranes provided by Toray. Enforcement of environmental standards remains lax in many parts of China, but the general picture is one of increased pressure on companies to improve their performance, he says.
This increasing environmental focus means China is ready for some of the world's most advanced water treatment technologies. Zhou reports that GE supplied the Chinese coal company Shenhua with a water treatment system capable of zero discharge of liquid pollutants. Most water treatment systems discharge some liquid waste, but Zhou says this was not an option in environmentally sensitive Inner Mongolia, where Shenhua operates a large-scale coal-to-liquid fuel facility.
Inner Mongolia is not only environmentally sensitive, it is also a part of China that is acutely short of water. Addressing such water shortages is rapidly turning into a major opportunity for companies that can provide cost-effective recycling or desalination technologies. Toray already supplies reverse-osmosis membranes to China's largest municipal wastewater recycling plant, located in the northeast city of Tianjin.
According to Dow's Yuen, systems that permit the recycling and reuse of wastewater are becoming increasingly cost-effective. "Solutions that were regarded as excessively high cost back in 2000 are now economically viable," he claims. The cost of operating water desalination facilities is dropping too, he says.
Dow boosted its Chinese capabilities in 2006 with the acquisition of Zhejiang Omex Environmental Engineering, a provider of technologies in the areas of ultrafiltration, membrane bioreactors, and electrodeionization.
Although Dow can produce many types of water filtration membranes, the company's main product is the reverse-osmosis membrane, a cross-linked polyamide composite used to remove salt or other contaminants from water. A primary focus of Dow's reverse-osmosis research has been to lower the energy consumption involved in filtration by reducing the pressure needed to push the water through the membranes.
AS THE COST of recycling or desalinating water decreases, China can look at some of its old water problems in a new light. For several decades, China has been mulling the construction of huge canals to divert water from the south of the country to the dry north and northeast. Construction of some of these canals is under way, even if their environmental impact has not been fully assessed.
Dow's Yuen contends that China should focus on making more effective use of the water that is already available in the northeast. Water diverted from the south would likely be polluted and require treatment, so it makes more economic sense to simply process the polluted water that's there now. "Wastewater is a resource," he says.
Furthermore, desalination already provides water that goes to industry in China's northeast and flows through some municipal taps. During the next five years, Yuen expects desalination to become more prevalent. He notes that China's water desalination plants tend to be more technologically advanced than elsewhere because they have to cope with the wide seasonal variations in temperature that occur in the northeast. Most of the world's desalination plants are in places such as the Middle East, where water temperature is constant. Plants in colder environments, for example, require higher operating pressure, which makes for challenging equipment design and higher energy consumption.
Toray's Lam agrees that reverse-osmosis membranes will become increasingly prevalent in China. Although the Japanese firm can supply a range of membranes, its focus in China is on high-end reverse-osmosis membranes. Chinese firms so far make only basic types.
Cognizant of the lack of local technology, China National BlueStar, a state-owned company, approached Toray last year to form a reverse-osmosis venture. Toray agreed to build a Chinese plant by 2010, complementing existing facilities in California and Japan. The venture will aid Toray's sales efforts in China, Lam says. "We have technology and experts; the local partner will help us with market penetration." The venture, Lam believes, will help Toray maintain the 20% annual growth rate it is enjoying in its China water business.
Doing business in China presents some unique challenges. According to Lam, who is Canadian, even if China is still a developing country, it takes for granted that it will be offered the world's most advanced technologies. "You're not doing business in some isolated place like the Canadian tar sands here; just showing up here isn't enough," he says.
Competition in China is extreme, Lam explains. "You cannot rely on any claim of technological superiority. They expect your product will do the job." To win customers' trust and business, he says, it's essential to visit them repeatedly. Beyond that, Lam says cost is supremely important in China. "Price, technology, and relationship are the three essential elements, with price being the most important," he says of the country.
Mouchiroud says SNF has been able to sell products at a higher price than its competitors in China. Unlike the reverse-osmosis membrane suppliers, which have no sophisticated local competitors, SNF competes against several Chinese flocculant manufacturers. He attributes SNF's pricing success to the fact that it has operated a manufacturing facility in Taixing, in Jiangsu province, since 2001 and that its product quality is more consistent than that of its Chinese competitors.
Charles Tian, head of water treatment chemicals at Ciba, which is now part of BASF, says it's next to impossible to tout superior technology in order to convince a Chinese customer to pay a higher price. Ciba's main product line in China is flocculants, the most important one being cationic polymers. Local Chinese firms are emerging as competitors, he says, but these companies still need to buy many of the key raw materials from foreign suppliers such as Ciba.
"We try to have different prices depending on how the product will be used, but the customers will focus only on the price," he laments. The fact that Ciba had to spend money in order to find the right type of flocculants to use is lost on customers, Tian says.
According to Tian, an additional particularity of operating in China is the need for managers to build staff capability. He says it's relatively easy in Western countries to hire water treatment professionals with, say, 10 years of experience in the field. In China, companies are often forced to hire people who have much less experience and build their capabilities. "We produce cationic polymers, and we produce managers," Tian says.
Another challenge in China, Tian says, is the difficulty that manufacturers face in supervising what distributors and resellers do with their products. He says many Chinese resellers will blend chemicals from Ciba with those from other suppliers and create a new package that may not state which company made what. This makes it very difficult for buyers to know exactly what the product is and where it came from.
Despite the problems, Tian says Ciba has been able to expand its water treatment business in China for the past seven years at growth rates exceeding those of its competitors. Like others in the water treatment field, Tian says the global economic crisis will have little impact on his business because China is expanding its water treatment facilities as fast as it can. China may be flooding the world with all of the products its factories make, but when it comes to water, it seeks to be flooded with the most advanced technologies around.
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