Opportunities and challenges for international players in China’s industrial water market

China’s industrial water market is the world’s largest, with a total spending of $3.4 billion USD for industrial process water and wastewater treatment. The Chinese market, on its own, accounted for about one fifth of the global total in 2019.

Despite its enormous potential, China’s industrial water market has been quite challenging for many global water companies to penetrate successfully. This market is highly dynamic and strongly driven by local regulatory and political forces. In addition, differentiated value chain positions and procurement routes make it difficult for global players to adapt.

Nevertheless, several major global water companies are considered well-established in China. However, each faces its own market challenges depending on the roles it plays across the value chain.

Regulatory forces and government policies as drivers

The Chinese government has exerted great effort and pressure to ensure industrial water efficiency and pollution prevention by establishing strict wastewater discharge standards, zero liquid discharge (ZLD) and water reuse policies. These drivers have fuelled the demand for industrial water treatment technologies.

Since 2015, national wastewater discharge standards have been strictly enforced in compliance with the Chinese Environmental Protection Act and Water Ten Plan published in the same year. For example, many centralized industrial wastewater treatment facilities are required to reach the levels of COD, total nitrogen, ammonia nitrogen and total phosphorus limits down to 15, 0.5, 0.5, and 0.1 mg/L respectively. Soon, local governments such as Beijing and Shanghai will follow up with even stricter local discharge standards.

Additionally, ZLD has been widely adopted for certain types of wastewater treatment and in specific geographical regions. Inner Mongolia’s local government requires that all wastewater treatment plants within the province adopt ZLD technology. Other policies have been implemented to promote wide application of ZLD technology, such as refinery wastewater in the coal sector, desulfurization wastewater in the power sector, and coking wastewater in the steel sector. Petrochemical, pulp and paper, and other sectors also have started to adopt ZLD technology.

Increasing the industrial water reuse rate is considered as an effective solution against water scarcity by China’s government. Sectors with high water demand (such as pulp and paper, petrochemical, etc.) are being pushed to reach a certain level of water recycling with a limited raw water extraction allowance issued by the local government. Greenfield projects undergo more complex and stricter environmental impact assessments of their wastewater treatment process.

Opportunities and challenges for global water players

Generally speaking, China’s industrial water market is highly competitive with a large number of local suppliers. However, most local brands are not very differentiated on product quality and technology competence. End-users often rely on brand reputation, product quality, and commercial factors to choose suppliers.

This is where the strengths of established global suppliers commonly stand out and create opportunities. These companies have strong market competitiveness with proven product quality, established market reputation, and strong project references.

This is especially the case for core component suppliers, and we can observe many successful global core component suppliers in China’s industrial water market.

However, even well-established global brands still face severe competitive pressure and threatened market share from local suppliers. These suppliers often have cheaper offerings and are highly preferred by small / medium-sized customers, which typically are less willing to pay for high-end products. Therefore, it has been observed that many global solution suppliers specifically target high-end customer groups in the Chinese market such as leading state-owned enterprises (SOEs) and international groups.

Furthermore, the strong local engineering capability of local EPCs has squeezed the market potential for global system integrators. Across the majority of sectors, local Chinese environmental EPCs are dominating the water market featuring strong engineering and system integration capability. It is difficult for global system integrators in the same value chain position to compete directly with local EPCs that offer low prices and are well-connected to industrial end-users.

To be successful as a system integrator or integrated solution provider, global players need to utilise their unique technology expertise to provide customised and high-quality products.

Other key factors for success

Amane has identified the following additional key factors to enhance the success of global players in China:

1) Level of product localisation
From the technology perspective, continuous efforts should be put into R&D to offer tailored products / systems and innovative solutions that are suited to local market needs.

In addition, a local manufacturing/integration capability is also beneficial, bringing a shorter product delivery time and cost saving over overseas shipment. Many global core equipment suppliers either have their own local assembly or manufacturing plants, or have partnered with local system integrators to offer finished solutions in China.

2) Strong commercial capability
Commercial capability is a very important factor to succeed in the China market. A good local commercial team can efficiently open new markets by building strong commercial relationships with Chinese end-users (especially SOEs) and design institutes, which eventually contribute to reference awarding.

3) Quick response aftermarket service team
Now, more Chinese end-users greatly value the quality of services for water treatment solutions. Capability to offer training service has become an important purchase decision-making factor by end-users to select solution providers. Also, end-users prefer suppliers that can quickly respond to their urgent needs such as onsite or online trouble-shooting within 24 hours.

China’s industrial wastewater treatment market has grown rapidly, driven by governmental and regulatory pushes, especially on the adoption of zero liquid discharge technologies (MVR, evaporation, ultrafiltration and reverse osmosis membranes) and water reuse technologies (ultrafiltration and reverse osmosis membranes). The surging market needs provide a great opportunity for global players to strengthen their presence in the Chinese water market, especially for RO and niche UF solution providers.

Chinese high-end customers, namely international groups, SOEs, and leading industrial groups, highly prefer international brands for their well-built brand reputation and track records for key treatment processes or core components. Such advantage will put the international players in a good position to compete against domestic suppliers in the high-end market. Additionally, if the supplier hopes to gain more market momentum, enhanced localization, commercial and service capability are the top three success factors.

About the Author

Alex Zhang is Amane Advisors’ Partner based in Shanghai, China. Alex has more than 25 years of experience in international environmental and energy related technology transfer and promotion to the Chinese market. Alex has strong experience and deep understanding on environmental project execution and commercial M&A. Before joining Amane Advisors, he was co-founder and former chairman of McWong Environmental and Energy Group and the former Vice Chairman of Guozhen Environmental Protection and Energy.