Exporting Clean Water -- 1

Clean Water ...
A Major Export
Part One

See also:
Clean Water ... A Major Export - Part Two

          How do you build a viable business exporting clean water? Upon first consideration, this would appear to be a fatuous inquiry. A bulky, ubiquitous commodity, trying to build a business on clean water appears to violate all the laws of "comparative advantage" upon which international commerce is founded. However, let’s re-focus the question, "How do you build a business exporting ‘clean’?"

          Supply is limited acutely. 97.5 percent of the world’s water is salt water in the oceans. Virtually all of the remaining 2.5 percent is locked in the polar ice caps. Only 0.01 percent of the world’s total water is fresh and usable. But demand is accelerating. Industrial demand for pure water is escalating. Historically, world demand for water doubles every 21 years. World population has surged from 4.1 billion people in 1970 to 5.6 billion people today, and is forecast to pass 8.0 billion people by 2025. The earth is inhabited by an additional 90 million people every year -- a number equal to the total population of Mexico.

          Recognizing this burgeoning need for fresh water to maintain growth and even survival in many parts of the world, Ionics, Incorporated of Watertown, Massachusetts, was founded in 1948 to develop economical ways of converting brackish, salty or recyclable water into fresh, usable water to avert impending environmental or public health crises. Two years later, the company applied for its first patent on the ion-exchange membrane -- the primary technology upon which its water desalinization business was to be based.

          Over the past half-century, Ionics has expanded dramatically now offering ten principal technologies serving nine quite diverse end-user markets. However, in 1995, membranes and the related equipment business continued to generate approximately 52 percent of Ionics’ revenues and 37 percent of the company’s earnings. This business is carried on a trend of customers eschewing chemicals in favor of membrane-based water purification and reclamation systems.

          The Arabian-American Oil Company (ARAMCO) purchased the world’s first membrane-based desalinization plant from Ionics in 1954; much of the company’s business during its first two decades was derived from the sale of hundreds of desalinization plants, initially in the Middle East and then throughout the world. Ionics has been a worldwide business virtually from inception.

          Requiring uniformly high purity water, beverage bottlers represent a substantial market segment for Ionics’ water treatment equipment. The company’s electrodialysis reversal (EDR) treatment systems have earned the confidence of brewers around the world. Eleven breweries in six Latin American countries are now using Ionics’ water treatment systems.

          However, while the company enjoyed robust growth through its first four decades, it recognized the instability of its dependence upon the cyclical capital equipment market. Building upon its technological preeminence, Ionics embarked upon a strategy of diversification in the mid-1980s carefully designed to assure (1) stable revenues, (2) better margins, and (3) a closer relationship with the end-users -- i.e., to sell product rather than equipment. The execution of this strategy has brought the company into four attractive markets that complement its core business.

Bottled Water

          With worldwide fear of the contaminants to be found in public drinking water, Ionics tested the bottled water business in 1984 through joint ventures in Saudi Arabia and Bahrain. Employing its unique proprietary water purification technologies, the company now produces Aqua Cool^® Pure Bottled Water both in the United States and abroad with high quality and uniform consistency from a great diversity of water sources. Following purification, a menu of sterile minerals are added-back to achieve a refreshing flavor. In fact, this water is free of the intrinsic impurities that are to be found in most of the boutique natural spring waters that have become so fashionable.

          Ionics now operates wholly-owned Aqua Cool^® distribution centers in 27 metropolitan areas supported by six purification and bottling plants located in the United States, the UK, Bahrain and Saudi Arabia. The customer base for this bottled water business has now surpassed 80,000 worldwide. Contributory earnings are derived from the manufacture of its own coolers, that are leased to customers. Despite the turbulent and competitive marketplace, Aqua Cool^® has become one of the fastest growing brands of five-gallon bottled water, covering a larger market area than any other single brand of five-gallon bottled water delivered to factories, offices and homes. This business exhibits neglibile customer disaffection, is notably stable, and is yielding consistently attractive profit margins.

          The other three prongs of Ionics’ imaginative strategy of diversification will be the focus of our subsequent column.

Ionics, Incorporated
65 Grove Street
Watertown, MA 02172
http://www.ionics.com/
Telephone: (617) 926-2500 -- FAX: (617) 926-4304

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Thomas A. Faulhaber, Editor
Email: [email protected]
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Brookline, Massachusetts 02446.5757

[email protected]

URL: http://www.businessforum.com/ionics01.html
Revised: August 6, 1996 TAF