One of the key takeaways from the BlueTech Forum this year is the strong link between water technology innovation, profitability and market share. This was evident in our panels on Intra-preneurship and Internal Innovation, Strategic Corporate Investors and New Entrants in the Water Game. Two categories of innovation deserve a closer examination: Disruptive Innovation and Sustaining Innovation.
Disruptive Innovation
Disruptive water technologies allow companies to displace incumbents, create high growth markets within mature markets, realize above average profit margins and create a sustainable first mover advantage. The water and wastewater market overall is relatively mature. There are incumbents, mature technologies, relatively slow growth rates (in the developed world at least), and competition that keep overall profits relatively low. However, within this context, two technology markets emerged in the past 10-15 years: UV disinfection and Membrane Bioreactors (MBRs). Both the UV disinfection market and MBR market are now worth billions of dollars. UV disinfection and MBRs were sold into a mature market where the overall market size did not grow. These disruptive technologies took market share from conventional technologies. Notably, it was new entrants who brought these technologies to market. Wedeco and Trojan were the innovative companies that led the way in UV, while Norit and Zenon were pioneers in MBR. Collectively, when these companies were acquired, they had reached combined turnovers of $750M and the acquisition value was close to $2Bn. Sludge pre-treatment technologies provide a more recent example of disruptive technologies making inroads into a mature market. Figure 1 shows the technology S-curve for the thermal hydrolysis sludge pre-treatment units installed by the Norwegian company Cambi. This figure shows the slow “lift off,” as the company struggled with the early adopters. It moved to early majority, and is, finally now, about to move to late majority. We are tracking a number of water technologies as they move through this process.
Figure 1: Cambi Thermal Hydrolysis Sludge Pre-treatment technology adoption (Source: Provided by Cambi to BlueTech Research)
Without at least a 30% efficiency improvement over the incumbents, it is difficult to break into mature markets. At BlueTech Research, we use our Disrupt-o-Meter™ to evaluate the disruptive level of a technology. This proprietary rating system categorizes water innovation into three categories: Low Disruptivity, Moderately Disruptive, and Highly Disruptive. Our hot tips for the next disruptive technologies are: 1. Ceramic Membranes 2. UV LED 3. Supercritical Water Oxidation (SCWO) 4. Capacitive Deionisation (CapDI) 5. Sludge Pre-Treatment We have seen seed investment in these areas and a number of promising companies, several of which presented in the BlueTech Showcase at the BlueTech Forum 2013.
Sustaining Innovation
While disruptive innovation is typically delivered by new entrants, sustaining innovation is best achieved by incumbent companies. This year at BlueTech Forum, we heard from incumbents, such as Siemens, Kemira, Ecolab, and PWN Technologies, on how they innovate from within. An example of sustaining innovation can be seen in the membrane desalination market. Three incumbents have over 70% of the seawater reverse osmosis desalination market, and while they continually innovate and improve their products, they don’t have a vested interest in fundamentally changing the industry. It would be very difficult, if not impossible, for a new player to break the stronghold that the large players have on this market without some form of breakthrough innovation. One company that is trying to break into the established RO membrane market with an improved membrane is NanoH2O. They have received $85M of investment so far to help them do this and are well-backed by strategic investors. We would classify the performance improvements offered by NanoH2O as moderately disruptive (30-50% improvement gain), which may be enough to allow them to break into the market. However, the incumbents deliver continued performance improvements year on year through sustaining innovation.
Why do companies care about innovation?
There are three key reasons companies are interested in innovation, all of which ultimately relate to profitability and market share. a) Disruptive technologies allow companies to access existing mature markets by displacing incumbents solutions. Examples of this include the way MBR was able to achieve market share in what was a very crowded, commodity, fragmented and low margin market. Similarly, UV disinfection displaced market share from chlorine disinfection. b) New technologies open up new market applications that did not previously exist. Regulations drive the water industry, and they move in steptoe with the availability of cost effective technologies. If a contaminant can be removed cost effectively proportional to the risk it presents, there is a good chance it will be regulated. Before arsenic regulations were introduced in the US, a cost benefit model was constructed. c) The bulk of the profit in technology comes when selling to the ‘Early Majority’ and ‘Late Majority’ phases of the technology adoption curve, which typically comprises two thirds of the buying population. Once a technology is selling to the ‘Late Majority,’ it is reaching maturity and the market starts to commoditize with competitive forces driving down the profit margins. There is a sweet spot, particularly the late majority stage of the adoption curve, where the cost of sales has gone down and the R&D costs have been recovered. To take advantage of the benefits, you have to be in early.
At the BlueTech Forum, delegates learned about the innovative and disruptive technologies of 11 companies and rated each for the Disrupt-o-Meter™ Award and the strength of a company’s go-to-market strategy for the BlueTruffle™ Award. Voltea took home the BlueTruffle™ Award, having convinced the water industry’s best and brightest in the audience that they have the strongest go-to-market strategy for their Capacitive Deionization technology. The Disrupt-o-Meter™ Award went to Crystal IS with their UV-LED technology that the delegates recognized as being a highly disruptive technology. Very close runners-up in each category include MIOX for the BlueTruffle™ Award and INNOVEOX for the Disrupt-o-Meter™ Award.
View Photos from the 2013 BlueTech Forum
Co – Authored:
Paul O’Callaghan – CEO
Tyler Algeo – Senior Water Technology Market Analyst