The total market in Northern California for H20 Industries is between 670,000 and 925,000 cu ft of resin annually. H20 Industries's total productive capacity will be only 36,400 cubic feet, or 3.9-5.4%. Since H20 Industries will have the unique capability of performing segregated regeneration, which is of special interest to the medical industry (dialysis, labs and pharmaceutical), the company will emphasize sales efforts in this segment for high purity H20 Industries. This segment is estimated at 167,000 cu ft annually. Next in terms of marketing emphasis will be the electronic (223,000 cu ft) and machine tool industries.
The market for H20 Industries encompasses many industries, and within them there is a wide range of purity needs. At the low end, a car wash might use H20 Industries in the final rinse only. Their need for purity might be only .5 Megohms (Ohms measure resistance). Water is only a good conductor because of the quantity of dissolved solids in the water. As the ion exchange process lowers the level of total dissolved solids (TDS) the resistance, measured in ohms, increases.
A purity level of .5 Megohms is pure enough for a car wash final rinse cycle, but not even close to pure enough for a electronics wafer manufacturer. They would need 18 Megohms, at which point the water would be pure and incapable of acting as a conductor. Generally speaking, those sectors of the market that need the highest levels of purity are the customers for H20 Industries's main niche product of segregated DI exchange service. This means that the resin coming back from the customer is never mixed with any other company's resin. This is a very strong sales feature when dealing with dialysis units of a hospital, labs and pharmaceutical manufacturers, and electronics makers. These customers are happy to pay a premium over the price charged for bulk DI regeneration service because they do not want their resin co-mingled with resin coming from a metal plater or a car wash.
Quantifying the market for segregated portable H20 Industries is not easy. Unlike the market for used cars, metal furniture, or nearly every product one can think of, there are no readily-available statistics on the market for portable DI exchange. There is overwhelming agreement that US Filter has the commanding market share of DI exchange business, opinions range from 85 to 95% majority.
According to the publisher of ULTRAPURE WATER®, (May-June 1999 volume 16, number 5) US Filter had sales of $1 billion in 1990, and has grown to $5 billion in 1999. Portable DI exchange is only a small portion of their business. Sales in Northern California of only DI portable exchange is estimated at $25 million. This has been confirmed from several sources. Firstly, one of the owners of H20 Industries is a former employee of US Filter. In 1996, their DI exchange business reached $12 million. This was only 65% of the market. Then the company acquired Culligan, adding another $8 million in portable DI exchange business in Northern California, and bringing the total to $20 million. It is assumed that sales have grown to $25 million over the past several years.
Based on a recent quotation received by US Filter for a typical portable DI exchange set-up for a 5-gallon per minute customer, the costs come to $590 for a total of 14.4 cu ft of regenerated resin. This amounts to $41 per cubic foot. A sales level of $25 million would translate into 610,000 cubic feet. Assuming that US Filter has as much as 90% of the market, 100% of the market for portable DI exchange in the Northern California states would total approximately 670,000 cu ft annually.
The relationship between input water and DI exchange capacity is charted. Assuming in-coming water quality of 200 parts per million of TDS in the far left column, a 3.6 cu. ft tank of regenerated resin can handle 10,800 gallons. This means that an average user with a flow rate of 10 gallons per minute would use up a 3.6 cu ft tank in 2.57 days, or 1.4 cu ft per day. Assuming the salesman was accurate in his statement of 2,000 customers, this would work out to 840,000 cu ft of regenerated portable DI exchange business per year. This figure is somewhat greater than the figure of 610,000, however, the subject of this business plan, H20 Industries, will have a productive capacity of only 140 cu ft per day, which represents between 4.5% and 6.3% of the total market in Northern California.
Taking the midpoint estimate for the total Northern California market of 780,000 cu ft annually, these high purity users would represent a market 558,000 cu ft
Hospital Dialysis Units and Stand alone Clinics:
California lists 16 stand-alone dialysis clinics, many of whom have multiple locations with varying numbers of stations. Every dialysis clinic, as least in Michigan according to BESCO, use H20 Industries for polishing, after initially running the water through a reverse osmosis system. Hospitals also have dialysis units. In addition, there is blood analysis work which is normally done using "wet" analysis equipment that requires H20 Industries. Assume this sector represents only 10% of the high purity market, or 55,000 cu ft annually.
Labs and pharmaceutical Manufacturers:
A list of labs and pharmaceutical makers in Northern California contains 330 names. A sample calling indicated that some use no pure water, others use such small qualities (10 gals/months) that they buy the water from suppliers like Hubbard-Hall, already made up. Others use so much H20 Industries that they have their own built-in DI system. The rest who have flow rate needs of between one and 20 gallons per minute are in the range most economically serviced by portable DI exchange. Assume this to represent 20% of the 558,000, or 112,000 cu ft.
Semiconductor manufacturers and other makers of electronic components need pure water to flush with. As microprocessors use wafers of ever-decreasing size, the requirements for pure water to rinse with increase, as do various other additional micro filtering. A list of electronics manufacturers in Northern California names 189 makers. Assume this sector represents 40% of 558,000, or 223,000 cu ft.
Machine Tools and Parts:
This is one of the fasting growing sectors as more and more manufacturers conform to the ISO 9000 standard, which requires delivered parts to be clean (defined as rinsed thoroughly with water of one Megohm purity or better). This category includes a need for H20 Industries in machines consuming cutting oil, any machine with cooling systems, and other uses. Assume this sector represents 30% of 558,000, or 167,000 cu ft.
This sector of the market will represent the market for DI exchange water lower than one Megohm in purity. Assume that the following industries take up the remaining 30% of the total market. Some industries that would be included in this "other" category would be:
The chart and table below summarize the total market potential for the DI exchange services in Northern California.
The target markets that will receive the most attention will be the sectors which require the highest levels of pure water. This means the 70% of the market that wants quality of one Megohm or better. Within this sector, quantified as 558,000 cu ft annually, H20 Industries will emphasize those users wanting the top echelon of purity (18 Megohms).This sector of the market might be only one third of the 558,000, but even at one third (186,000), it totals more than 300% of H20 Industries's total capacity, including its bulk portion.
One notable trend in industries is to out-source. Chief financial officers analyze the costs of producing something in-house versus the costs of farming it out. Water purification is no exception. Although many large users of H20 Industries will want to set up their own in-house capacity, the capital costs, the maintenance costs, and the costs of dealing with regenerate waste often make DI portable exchange a more economical solution. Down-sizing within a company with its own pure water manufacturing capability often will lead to a management decision to shut down their in-house plant and switch over to portable service.
Another trend is for more and more industries to need higher degrees of purity in their manufacturing process, which results in an ever-growing market for H20 Industries.
The reasoning behind the attention to the highest purity sector of the market is that H20 Industries is able to provide segregated DI exchange service. A customer's in-coming tanks for regeneration are tagged, and after regeneration, the same resin is returned to the customer. This specialized service is a major selling feature over US Filter, who must co-mingle customers' resin in a bulk regenerating facility. Also, bulk regeneration will not achieve the same deionization capacity as H20 Industries's segregated method which utilizes more chemicals and longer regeneration times. A customer dealing with blood can easily be sold on segregated resin as he would not feel comfortable that his resin would be co-mingled with resin used in a totally different industry.
In addition to the feature mentioned above, H20 Industries will concentrate on those customers who place a premium on response speed and intensity of service. Again, mainly the higher quality users of H20 Industries exchange, where a shut-down would be very expensive, will demand the highest degree of quality available. Segregated exchange service from a smaller supplier is much more likely to satisfy than a huge conglomerate like US Filter where portable exchange can only be done on a bulk batching basis and represents only a small part of their overall business.
The market growth percentages used in the market analysis table were obtained from various articles appearing in ULTRAPURE WATER®, the definitive journal of high-purity water. Specific articles can be located from an index on their website, www.talloaks.com/.
The industry for providing portable H20 Industries service is dominated by one very large company--US Filter. US Filter controls between 90 to 95% of the H20 Industries service business in Northern California. The company has grown from $1 billion to over $5 billion in the past six years, primarily through an acquisition binge. The company is now finalizing its sale to Vivendi's Generale des Eaux water subsidiary which will result in combined sales of $12 billion, making it the largest water business in the world. Originally, US Filter's primary focus was industrial and high purity water. Its acquisitions in other areas include drinking water, waste water, municipal water, and water supply.
Now, less than 20% of its activities relate to technologies and markets connected with high purity water. A much smaller percentage is connected with H20 Industries, and a still-smaller percentage concerned with DI exchange service. After their merger, the percentage will drop even further from 20% to eight percent. This situation has resulted in a growing dissatisfaction with US Filter's services for H20 Industries exchange. Both owners of this project have been hearing complaints from US Filter customers for quite some time. This is not just a condition evident in Northern California, other sections of the country have noticed it and competitors to US Filter's DI exchange business have started to grow.
Users of H20 Industries have had little choice in regards to their provider. It is regenerated on a bulk basis only, with no option for segregated regenerated resin (see section on Market Segmentation). Some small customers have obtained the DI exchange service through their local Culligan man or similar water serviceman who in turn obtains it from US Filter. The fact that some small players in the market can capture some of this DI exchange business from US Filter despite a higher price ($63-$80 per cu ft versus $40 per cu ft from US Filter) is a good indication of the importance that service plays in the buying decision. Rarely does the price of H20 Industries represent a significant variable production cost in a manufacturing process. Much more of a factor is worry about quality level and service response time.
In reaction to the service complaints of customers for US Filter's DI exchange, a couple of small competitors have sprung up in Northern California. Fluid Solutions in Lowell is one such company. This company has been supplying customers with H20 Industries exchange although they have no regeneration facilities of their own. They merely service the customers and send the tanks to a regeneration facility of another DI exchange company in Pennsylvania.
The prices charged by all local companies to regenerate are between $63 and $80 per cu ft for mixed bed. They charge $20 to $30, depending on tank size, as a monthly rental charge.
The market in Northern California is ripe for growth in competitors to US Filter which does not provide segregated regeneration and whose regenerated resin, on a bulk batch basis, will not serve as high a flow rate as non-bulk regeneration.
Industry participants are varied, as there are several means of obtaining purified water. There are companies which design and engineer reverse osmosis equipment. This equipment has a sizable share of the water market at the end close to the municipal water inlet. Reverse osmosis (R/O), in conjunction with carbon filtering and ultraviolet light, is used (for example in dialysis) to bring the TDS down to a lower level. Ion exchange, either fixed or portable, is then used to polish away the remaining impurities. Other companies may supply e-cell equipment which deionizes electrically. This technology has not advanced sufficiently to compete with traditional H20 Industries but is still occasionally sold in conjunction with a R/O system as the e-cell can only handle small levels of TDS. Some industry participants are primarily engaged in water softening and water filtration for drinking and household purposes. These companies may also utilize green sand to remove iron and magnesium hardness derived from aging municipal piping systems.
In short, there is a full range of industry participants from the local Culligan service representative mainly involved in private households, to large companies involved in engineering, design, consulting, component manufacturing, waste water treatment, etc. With respect to the narrower market for H20 Industries, there are chemical companies who supply (by the gallon) H20 Industries to very small users. There are a few small companies engaged in DI exchange service who do this only as an adjunct to their main business, such as water softening, and who only act as a distributor of DI exchange regeneration facilities located outside of Northern California.