Environmental Market to Remain Flat in U.S

Article excerpt

industrial perspective

Companies should seek business expanded opportunities in developing countries

(This article was adapted from the 2001 Industrial College of the Armed Forces Environmental Industry Study)

The environmental industry is now at a crossroads. In the past, growth was driven by the need for compliance with regulations and focused heavily on the cleanup accomplished after the polluting occurred. Now, substantial compliance with existing regulations has been reached.

Although the regulation-induced demand for the industry's products and services is eroding, there is a growing demand for high productivity and sustainable growth. Yet, the industry has been slow to adopt the creative and technologically innovative approaches necessary to meet these new demands.

This reluctance is due, in part, to budget constraints, traditional thinking and outdated regulations that prescribe a focus on post-pollution clean-up. For the U.S. environmental industry to remain viable and to grow, government and industry leaders must develop policies that encourage simultaneous economic growth and environmental protection.

The global market for environmental products and services is worth about $520 billion per year. At approximately $205 billion, the U.S. represents 39 percent of the global revenues and ranks number one in the world. It is almost twice the size of its nearest competitor, Japan. Last year, U.S. exports of environmental technology goods and services topped $21 billion, producing a positive trade balance of $10 billion and creating about 170,000 jobs.

The environmental industry accounts for 1.4 million U.S. jobs in over 115,000 revenue-generating companies. In terms of both revenue and employment, the U.S. environmental industry is larger than many other industries, including aerospace, computer hardware, paper and allied products, petroleum refining, steel, textiles and chemicals.

Municipalities represent the largest single component of the U.S. market. More than 80,000 units of local government acquire about $65 billion of environmental technologies annually. Approximately 95 percent of the businesses are considered small, with an average of 12 employees and annual revenue just below $5 million.

The market is expected to remain flat in developed countries. Some key emerging markets are, however, growing rapidly in parts of Asia, Eastern Europe and Latin America.

Domestic growth is expected to remain at about 2.4 percent, and investment is at its lowest level in 30 years-driven by the uncertainty of the U.S. stock markets and regulatory uncertainty in the environmental industry The sector is fragmented, represented by 170 national trade associations.

Overall, the U.S. environmental industry is now displaying classic signs of a maturing sector. Signs include decelerating growth, heightened competition, growing sophistication among its client base, greater emphasis on marketing, consolidation of market share in larger players and an increasing number of mergers and acquisitions.

The economic power of the industry is difficult to measure, because so many of its products are integrated into other industry outputs and processes. In the 1970s, the U.S. market was driven by regulation that focused on clean up and "end of pipe" solutions.

With the deregulation of utilities the market began to shift horizontally. In the 1990s, customers began demanding a wider range of products and services that were beyond "end of pipe" solutions. Customers sought competitive advantages, such as higher productivity, reduced waste of energy and materiel inputs and greater reduction of environmental residuals. For instance, the use of innovative technology such as satellite imagery to identify and resolve specific environmental problems through remediation are not captured under the current measures of the industry.

These horizontal shifts in the market make it difficult to determine the true economic health of the industry.

U.S. competitiveness abroad, meanwhile, is weak in many segments of the industry. Of the 117,000 businesses engaged in the industry, 4,300 are exporting goods and services. U.S. exports represent 9 percent of environmental revenues compared to competitors' 15-20 percent.

The U.S. biggest competitors are those developed countries with the most advanced policies and frameworks such as Germany, France, the United Kingdom and Japan. The U.S. has an advantage in consulting and engineering as well as instruments and information systems. Germany leads the world in exporting pollution abatement equipment. Japan, whose government promotes both pollution cleanup and prevention technologies, has taken the lead from the U.S. in air pollution control equipment exports. Having privatized over 70 percent of their water and wastewater industry, France and the United Kingdom currently dominate the international market for water and wastewater treatment technologies and services.

The U.S. industry possesses sufficient technical capability to compete in the water-related segments. But it is unable to compete in the business and financial aspects, since 70 percent of U.S. entities are still in the public sector. This is of significant concern as water treatment and water utilities make up 30 percent of the global market and represent huge potential revenues. Additionally, many U.S. municipalities are considering using foreign companies as they shift toward privatization.

The products and practices associated with pollution prevention are considered the future of the industry. Despite some rapid growth in the prevention market, however, the vast majority of spending in the U.S. industry is still directed toward traditional remediation and "end of pipe" treatment technologies. Advanced technology needed to move the industry into the abatement and prevention phases is hampered by an outdated regulatory system, inconsistent regulations and enforcement and a lack of financing needed to get technology into the commercial market.

As a whole, pollution control regulations still reflect the "command and control" philosophies put in place early in the environmental program to dictate emission and discharge limits. This format tends to also dictate or favor many existing technologies or processes-causing existing technologies to gain certain monopolies, hindering innovation.

As the past three decades have shown, regulations that drive the environmental industry have been frequently rescinded, altered, and inconsistently enforced. Additionally, state and federal regulations often differ, as do regulations between states. These variations in regulations deter anyone investing time, money, or other resources to develop or purchase new technologies.

The financial community is wary of investing in the industry due to heavy regulations and vulnerability to rapid changes caused by political decisions.

Government Funding

Government investment is lacking. Although U.S. government spending on research and development (R&D) is higher than every country except Germany, the percentage of GDP devoted to R&D is far below those of foreign competitors. Little financial aid exists for the commercialization and marketing needed to bring new technologies to market.

These funds are stopped to prevent the appearance that the government is competing with industry. As a result, many good initiatives are abandoned after the R&D stage before they are brought to market.

The high relative risk and difficulty in doing business abroad has hindered U.S. competitiveness overseas. Business development costs abroad are three to five times the costs in the U.S. This is a significant detractor, since the industry is primarily made up of small and medium-size companies. These companies are least likely to find the financing or information necessary to cover the increased expenses.

Further, smaller U.S. companies often find it difficult to compete with larger foreign firms that receive significant support from the government. Many U.S. businesses are apprehensive about conducting business overseas due to the difference in culture, monetary systems, laws and regulations. Finally, few U.S. companies have found it necessary to do business abroad. Although markets and opportunities abroad are growing, the size of the domestic market and general health of the U.S. economy for most of the past decade have induced few to actively pursue overseas ventures.

Industry leaders cite several major areas of action that companies must take, in concert with government, to ensure the environmental industry's future competitiveness.

1. Offer new, value-added environmental products and services. The future competitiveness of the industry will center on its ability to deliver value rather than simply correct problems.

2. Reform government polices to stimulate the environmental market. Systemic change-not more experimentation, initiatives and pilot programs-is needed. Some form of policy direction is essential to both benefit the environment and enhance national competitiveness. Industry leaders, however, do not argue for new rounds of regulations. Replacing "command and control" regulation with performance-based regulations and information-based mechanisms is the solution.

3. Improve govemment/industry cooperation to expand environment-related exports. Greater cooperation on environmental exports will influence the ability of the U.S. industry to contribute to environmental gains worldwide.

4. Value the environment in national and international economic systems. The free exploitation of the environment has been replaced imperfectly by variable regulatory-based pricing. The opportunity and need for more effective government policies, not necessarily regulation, is nowhere more apparent than in the relationship between government and industry for the environment and the economy.


Under the market conditions of a mature industry, companies have little to differentiate themselves from each other and thus compete on price, typically bringing down profits.

The old, regulatory driven, "command and control" nature of the industry served a very useful purpose; it dramatically improved the environmental quality for the American public. Industry leaders believe that environmental regulation hobbles the competitiveness of the U.S. environmental industry, increases environmental costs and discourages the adoption of innovative solutions. Not only does each increment of new prescriptive regulation result in less "return" in terms of social benefit, in their view, but the environmental industry's dependence on government regulation to create customer demand has narrowed its competitive strategies. Without a fundamental change in government policy, industry will have to look to the international market for growth opportunities.

Industry leaders say a partnership between government and industry is required to develop these global markets. The industry would provide products and services, while the government would help improve coordination of U.S. export programs and work closely with international finance institutions.

The outlook for the environmental industry is still promising-provided it shifts its focus to international markets. Water supply and wastewater treatment in developing nations, primarily in Asia, Latin America, and Central Europe, should be prime targets for U.S. export development-pecially to compete on a global scale with French and British firms that currently enjoy a distinct competitive advantage in these areas.

Asia and the Pacific are facing serious environmental challenges. High population densities, continued rapid economic growth, and industrialization are likely to cause further environmental damage. Water supply is a problem, with one in three Asians having no access to safe drinking water. Energy demand is rising faster than anywhere else in the world. Asia's trend toward populations in mega-cities is likely to increase environmental and social stresses.

The environmental market (all 1998 figures) in the Philippines was over $600 million, in South Korea over $5 billion, in Taiwan over $5.2 billion, and in China over $10 billion.

In Latin America, nearly three quarters of the population live in mega-cities (similar to the situation in Asia) where air quality threatens human health and water shortages are common. The depletion and destruction of forest resources, especially in the Amazon basin, threaten bio-diversity. The Latin American environmental market reflects demand for water utilities, solid waste management, water equipment and chemicals, water treatment works, waste management equipment, air pollution equipment, consulting and engineering, resource recovery, hazardous waste management, instruments and information systems, analytic services, and environmental waste-to-energy projects. Among the sub-markets, potable water, municipal sanitation services and industrial wastewater treatment offer the best opportunities for U.S. environmental firms.

The European Union (EU) is the United States' largest export market for environmental technologies, with U.S. exports expected to grow to $158 billion by 2005. The markets in Mediterranean countries, where environmental progress has lagged behind that in the northern region, are generally less saturated by European suppliers.

Although U.S. exports to Central-Eastern Europe are expected to reach $18 billion by 2005, the U.S. currently has a small (about 5 percent) share of the CEE market. Since the early 1990s, CEE governments have been enacting legislation to reverse the damage caused by decades of heavy industrialization and to bring their nations into conformity with EU environmental standards. Poland, the Czech Republic, and Hungary have made the most progress in environmental improvements. U.S. firms have an opportunity to gain a foothold in those markets through U.S. export assistance programs targeted specifically for that region. The best potential market for U.S. environmental exports is Hungary, where the United States is already the largest foreign investor with $5.5 million in 1999.


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