Turning on the waterworks

Growth strategies to create a best-in-class water treatment company in China

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From 2006 to 2013, China increased its municipal waste water volume treatment rate from approximately 45 to 80 per cent. In the process, many players have gone public and shown strong top-line growth. However, this rapid expansion of municipal wastewater treatment has led to declining net profit margins and a reduction of greenfield opportunities for companies that mainly operate treatment facilities. In the following article, Michel Brekelmans and Steve Cao from L.E.K. Consulting Shanghai explore winning strategies that can help to improve performance and create leaders in China’s water treatment industry.

We recently witnessed a renewed interest in China’s cleantech sectors following the initial surge of five to six years ago. Although water treatment doesn’t have the same ‘sex appeal’ as solar energy or battery-powered vehicles, the development of the Chinese water treatment industry has nonetheless been spectacular in terms of growth and the opportunities created by industry champions.

However, the industry has reached an inflection point – the easy growth route is getting harder and harder to follow. Non-organic growth approaches and an improvement in organisational performance may be necessary for further value creation as the market environment is less compelling than before:

  • The market is expected to grow only moderately going forward: further penetration growth is expected to be limited after the rapid growth of previous decades.
  • The industry is fragmented, though most of the more than 400 companies have established a certain geographical focus with relatively high entry barriers due to deep local government involvement.
  • In general, waste water treatment plants operate at low margins under the current tariff regime and therefore rely heavily on government subsidies.

Of the more than 400 companies serving the industry, 27 listed companies contribute approximately 28 per cent of the total revenue. These players grew on average between 30 to 60 per cent per year between 2010 and 2014, but net profit margins declined around one and half percentage points per year over the same period.

With profits waning, industry participants and investors alike would be right to look for new opportunities in companies that either p