NEWS RELEASE September 2020
Routes to Maximizing Profits
Flow optimization is a trillion dollar per year business for process, equipment, component, service, engineering, and construction companies. Flow includes liquids, gases, and free flowing solids. Hundreds of thousands of companies derive much of their revenues from this market.
Some companies focus just on water. Xylem is committed to "solving water" by creating innovative and smart technology solutions to meet the world's water, wastewater and energy needs. It previously emphasized the three Ts. (treatment, transport, and test.)
For others water is important but just part of a much bigger business. The name Danaher is derived from the Celtic word for free flowing. The company claims leadership in the markets that define it today, beginning with water in 1998 and followed by product identification (2001), diagnostics (2006) and life sciences (2009). It built on its Hach measurement success and added Pall in filtration and Chemtreat in treatment chemicals.
Some companies are focused on air. Daikin says it is the global leader in air conditioning, with HVAC&R, fluorochemical, and filtration products. Its acquisition of AAF and Flanders made it an air filtration leader.
Some companies are process system suppliers. GEA and Alfa Laval provide centrifuges and filters as part of their food industry process designs.
Other process companies made the unfortunate choice of pursuing the power industry. GE doubled down on this choice with the purchase of Alstom in 2014 and plummeted from the top company in the Dow 500 to being delisted. It has lots of historical company. Combustion Engineering, Research Cottrell, Lurgi, Deutsch Babcock and a number of conglomerates were high flyers in the flow segment of power and ended up bankrupt or in fire sales.
Whether it is wisdom or luck the flow optimization companies which have prioritized food, pharmaceuticals, electronics and certain other high growth markets have done better than those who chose power, mining, and steel.
Pick the right industries: So we can conclude that picking the right industries is a big part of flow optimization success. The questions are
- What is the flow percentage of industry revenues?
- What will be the industry growth rate?
- What will be the flow percentage of industry revenues in the future?
This last question is the key to the huge flow losses in the power industry. Flow optimization is a large expenditure in coal fired power but almost none in solar and wind. The market has also been erratic with pollution control expenditures coming in waves due to regulation.
Biopharmaceuticals, desalination, and indoor air are attractive markets with high growth and increasing percentages of flow compared to industry revenues.
Pick the right products: In general potential profitability and capital investment are linked. Manufacturers of valves and pumps need to make big investments in manufacturing plants. On the average these companies have done better than those flow optimization companies with products which require knowledge and in many cases risk but not high capital investment.
On the other hand some of the biggest successes have been the products built on knowledge. MikroPul invented pulse jet cleaned dust collectors in the 1950s and enjoyed a decade where competition was restrained by patents. Reverse osmosis (RO) was another knowledge success in the 1970s.
Over the decades the RO profits went from knowledge companies to materials companies. Dow Chemical became the largest supplier of the membranes used in RO.
Materials companies making non-woven products from diapers to wipes are among the beneficiaries of the soaring indoor air market caused by COVID. This includes household names e.g. Kimberly Clark & 3M as well as specialty producers such as Berry and Lydall.
Adding software and remote O&M to a high capital investment product portfolio can combine high ROI with stability. Howden sells mine ventilation fans. They acquired a company which allows them to remotely operate and maintain ventilation to maximize mine safety.
Andritz makes products such as pumps and filters. With operating software called Metris the company greatly increases the potential profit at each site. This potential has grown due the pandemic.
Pick the right geographical combination: The U.S. has only 4% of the world population China is likely to overtake the U.S. in terms of nominal GDP within the next three years. It already leads in terms of purchasing parity. The UK has withdrawn from the European Union and the steady progress toward free trade worldwide has been slowed if not reversed.
But a careful analysis of the flow optimization industry reveals companies which are truly international in terms of both sales and purchases. Mann + Hummel has research facilities in the U.S., Germany and Singapore. Thermo Fisher has a large air research center in Shanghai.
Valve and pump companies rely on Indian and other Asian producers of castings for components. Chances are that the steel used in the product came from a plant owned by Arcelor Mittal.
Politics will remain an important factor influencing geographical decisions. Therefore continuing analysis is necessary.
Pick the right applications: In the industrial segment there are intake, cooling, combustion, specific processes and finally exhaust air, liquid and granular solid treatment. Virtually every plant has similar water and air intake needs. What is unique are specific processes. These often require high performance rather than general performance products. Margins are higher but the markets are smaller.
Cleanrooms represent a multi process application because they apply to industries as diverse as semiconductors and pharmaceuticals. Aseptic processing for food and pharmaceutical industries is also a hybrid application. Hybrid applications are attractive because they have the high margins associated with processes and the larger market associated with intake and discharge.