NEWS RELEASE May 2019
Factors Shaping the Combust, Flow and Treat (CFT) Market
There are significant changes underway in the Combust, Flow, and Treat (CFT) industry. They are triggered by the following
- The market is internationalizing faster
- The profit opportunities are in high performance rather than general performance products
- The purchases will be based on lowest total cost of ownership
- The Chinese government is a positive force with new rules
- The large international purchasers will shape the market rather than countries or regions
- Individual companies need to develop organic and acquisition growth strategies taking into account these factors
The market is internationalizing faster
Combust, flow, and treat (CFT) suppliers have to deal with the reality that Asia is where the game will be won or lost. 1n 1946 the U.S. generated most of the coal fired power. It produced most of the steel, chemicals, and pharmaceuticals. Today China produces more than half the world’s coal fired power, cement and steel. Asian countries are rapidly building generic drug plants. Taiwan, South Korea, China and Japan dominate semiconductor wafer fabrication.
European suppliers such as KSB and Metso have long coped with the reality of small domestic markets. They have become true international suppliers with substantial Asian market share. U.S. companies have not fared so well. GE, Babcock & Wilcox, and a number of the pump and valve companies have failed to become Asian leaders.
There are exceptions. Thermo Fisher has set up its world air pollution research center in China. Let’s consider the intellectual property implications. The company is affirming that they have loyal employees who will guard intellectual property regardless of where they are located. In fact international business is based on trust.
In the coal fired power business MHPS based in Japan and Doosan based in South Korea have built relationships with partners around the world and have succeeded whereas Combustion Engineering, Foster Wheeler and Babcock & Wilcox who once dominated coal fired power are now part of other companies or have a reduced role. The Chinese boiler system suppliers are playing a large role not only within China but in the rest of Asia.
The U.S. has one big advantage. It is producing low cost oil and gas thanks to hydraulic fracturing. However, U.S. CFT suppliers will look over their shoulder to see Sinopec in pursuit. Sinopec is supplying complete fracking truck systems in the U.S. using Chinese made pumps and valves. Sinopec has just purchased some of stock of Boqi who is one of the three largest air pollution companies in China.
The profit opportunities are in high performance rather than general performance products
For high performance products, International suppliers will justify greater R&D based on the expanded sales potential. This will lead to better products and higher margins. Local suppliers of general performance products will reduce the international opportunities in this segment.
The purchases will be based on lowest total cost of ownership
Higher performance products are purchased based on life cycle costs. Purchasers are increasingly relying on data analytics and remote monitoring to enable them to accurately determine the TCO.
The Chinese government is a positive force with new rules
China is now a manufacturer of high performance products. The fact that Neway Valve is suppling valves to the nuclear industry around the world is one example. China is now operating far more ultra-super critical coal fired boilers than the rest of the world combined. The air pollution systems are subject to the tightest standards worldwide.
In possibly the most important initiative China is encouraging ultra-low emissions by supporting third party operation of air pollution control systems. This is allowing system suppliers such as Boqi to transform their business model from build to build, maintain and even own. Contracts are let based on meeting emission limits for a fixed fee. This creates a big opportunity for international suppliers with better pumps, valves, nozzles, filter bags, or fans to participate in the Chinese market. The BOO operators become major CFT product purchasers.
The development has downside risks for international suppliers. Since China operates close to 50 percent of the world’s coal fired boilers, the development of the best products will most likely happen in China. So the international suppliers will have to have superior R&D and superior products to win.
The large international purchasers will shape the market rather than countries or regions
End users such as BASF and Arcelor Mittal are making CFT decisions for plants scattered throughout the world. More than half the CFT purchases will be made by just 10,000 companies. Suez and Veolia are major worldwide CFT purchasers because of their third part operation initiatives. Now a whole new wave of Chinese companies will also be in this category. This includes not only operations within China but all along the new Silk Road with the Chinese Belt and Road Initiative (BRI).
Individual companies need to develop organic and acquisition growth strategies taking into account these factors
Success is not going to be predicted from the extension of past financial results. Companies such as B&W, Eastman Kodak, IBM, U.S. Steel and many others have learned this the hard way. When one valve or pump company is considering acquisitions a major question should be “how will this impact market share in Asia”. A CFT company will not be able to dominate regions representing 40 percent of the world while allowing competitors to dominate the other 60 percent.
Further analysis of the CFT market by individual product is found in the McIlvaine Market Reports. They are described at http://home.mcilvainecompany.com/index.php/markets
A program to effectively pursue the international CFT markets is outlined under Most Profitable Market Program at www.mcilvainecompany.com