The GCC region remains an indispensable market for the global water pump industry owing to growing demand for water. But with the region plagued with low oil prices that continue to constrain government budgets, can the industry survive the current storm?
While turbulent global economic conditions are already causing price wars and dampening sales, industry players and analysts expect demand for cost-effective, easy-to-install water pumps to balance out any fall in overall uptake.
Demand for water in the GCC resulting from rapid population growth and urbanisation is expected to drive the region’s desalination capacity by more than 40%, while municipal use and real estate construction are projected to considerably account for an increased need for water pumps.
“The decline in oil prices since the beginning of 2015 has certainly slowed down demand as projects either get delayed or cancelled,” says Tonjes Cerovsky, managing director at the Middle East branch of German headquartered KSB, one of the top four pump manufacturers around the globe.
“But there is a high degree of certainty that the market will heat up again sooner than later because investment in water for this part of the world is a top priority for governments.”
The GCC is expected to deepen expenditure on water projects amidst challenges in meeting the growing water requirement for industries, improving water supply and sanitation for the growing population, and planning to prevent depletion and contamination, and optimisation of available water resources.
Water pumps are the main fluid drivers in desalination plants, waste treatment plants, sewer and irrigation systems, residential and commercial buildings and most recently in district cooling plants.
According to a recent report by Research and Markets, the global water pump market was valued at $40,452.9mn in 2014 and it is expected to grow at a compound annual growth (CAGR) of 5.6% during the period 2016 - 2020.
The report suggests that rapid growth of the urban population is creating pressure on the existing water infrastructure, which includes delivery of utility water and removal and treatment of wastewater.
It points out the main demand drivers for global water pumps as the growing construction industry and rising disposable income, growing water scarcity, rapid industrialisation in developing economies, and rising level of urbanisation.
“These are constant factors that will continue to make investments in water projects a necessity, and therefore keep alive the market for water pumps in this region,” says Cerovsky.
“But under current conditions, manufacturers and suppliers are putting a freeze on their expenditure and cutting down costs. Any mergers and acquisition plans will be put on hold until sometime next year when there is more clarity in the market.”
Cerovsky says that KSB has taken a position to cut down expenditure and freeze recruitments while keeping an eye on developments. “We will still try to grow a little, but we must keep our costs to the bare minimum.”
He says that despite low oil prices, KSB was able to register 18% growth in 2015 compared to 12% in 2014, way above the region’s 5% average GDP growth, an indication of a healthy business trend.
But with oil prices showing no signs of a miraculous recovery and with regional governments reshuffling their budgets, Cerovsky is uncertain whether this growth trend will be sustained this year.
“We can only hope prices to bounce back by the second half of this year which will give a boost to budget in the region,” says Cerovsky.
But eventually low oil prices and a slash in budgets will not deter government expenditure on water, the region’s basic need, especially with the GCC population projected to reach 53.5 million by 2020, a 30% increase over the level in 2000.
It is this projection that is inspiring more international pump manufacturing companies to set up regional factories and also acquire existing local companies to cash in on the anticipated water pumps demand surge.
Early this year, US water company Xylem, announced that it was investing $35mn on new facilities across the Middle East and North Africa that include a new manufacturing plant in UAE and sales offices in Oman, Qatar and Saudi Arabia.
The company has bought off a 10,000 square meter warehouse in Dubai’s Jebel Ali freezone that will house the factory whose operations are expected to commence later this year. Another 2,000 square meters of land have been purchased for an office block that will house Xylem’s regional headquarters.
“The whole idea is to get closer to the market and get a clear understanding of what our clients need. This region presents great potential for our water pump business due to the growing demand for water resulting from rapid growth in urban population and construction,” says Vincent Chirouze, regional director, Xylem, Middle East and North Africa.
“Based on feedback from our clients, we will localise our products to suit their needs, which will significantly cut down costs and ensure on-time delivery.”
Xylem intends to use the facility to host a training and learning centre providing training to engineers, contractors and installers in the proper design, installation and maintenance of water related technology solutions and applications.
“We view the low oil price environment as an opportunity to invest and expand in this market while many of our competitors are being cautious or even limiting their investments,” Chirouze pointed out. “As the Middle East works hard to address long-term water security in the region, we are positioning ourselves for long-term growth and success.”
Last year, Sulzer, another pump manufacturer announced a joint venture with Saudi pump factory following its acquisition of a 75% stake in the Saudi factory, despite the prevailing economic uncertainties.
The joint venture will enables Sulzer to localise its products and also get closer to its clients in Saudi Arabia and the entire GCC.
The business prospects in the region continue to lure more international water pump manufacturers, especially as sales in other parts of the world take a dip, a move that worries traditional players operating in an increasingly saturated market.
While under a normal business environment competition would be considered normal and healthy in terms of ensuring that end users get the best of services and products at the lowest of prices, it might not be the case in the GCC as counterfeit water pumps continue to flood the market, creating unfair competition.
While local authorities have stepped up measures to curb the inflow of low quality knock-offs of established brands, millions of containers loaded with such products continue to find their way into the region.
For instance, water pump manufacturer, Pedrollo, has through a partnership with the Economic Departments of Dubai and Sharjah seized over 6,000 fake water pumps carrying that were being sold in the UAE and presented as original Pedrollo pumps.
“Counterfeit pump products not only cause financial loss to the copied brand but also put the company’s reputation on the line. Unsuspecting buyers may not be able to tell the difference between an original product and a fake,” says Joseph Gomes, general manager of Pedrollo Gulf.
Gomes says that Pedrollo has in the last five years lost business worth $4mn due to its water pump brand being imitated, adding that all major brands are battling a similar problem which he says has escalated because of a lack of steady enforcement.
But besides the danger posed by counterfeits, growing business competition is advancing the practice of credit, which continues to strain low cashed businesses and even edging some companies out of the market.
“Delayed payments are severely hurting businesses, and unfortunately credit is becoming standard business practice. If you do not supply, your competitor is ready to provide the required pumps at an even higher credit,” says Gomes.
He says that it is a risky business practice that has cost suppliers millions of dollars especially to clients whose companies have closed down and left with no single trace.
“Once again, local authorities need to step in and design laws that will protect suppliers. Something needs to be done to boost the waning confidence of suppliers in a marketplace that is becoming increasingly risky,” says Gomes.
Although the prospects for the water pump market in the GCC remain positive, industry analysts and players anticipate a slowdown in growth over the next two to three years, which calls for companies to pay close attention to their cost base and tighten operational expenses.
But as more companies eye the GCC market, and with competition expected to grow further, it is only products designed with the customer’s tastes and preferences in mind that will take the day.
For instance, most established manufacturers are now starting to integrate automation into their pumps to make them smarter, setting a newer trend for intelligent pumps. The growing use of variable speed drives (VSDs), particularly intelligent drives for pump control represents a major departure from the standard operating practice of using control valves to vary fluid flow.
With its low energy usage and low maintenance outlay, the total lifecycle cost of a VSD-controlled pumping system can be significantly less than traditional pump technology.
“Benefits include smoother start-ups and production changes, more precise control during continuous operation, and faster diagnosis of potential system problems before product quality or process operation is negatively affected,” says KSB’s Cerovsky.
He says that KSB has already created an entire division charged with automation for all types of pumps.
Cerovsky says that customers now demand pumps that feature enhanced connectivity, reduced energy consumption, minimised downtime and qualities that intelligently react to, as well as prevent, real problems, preferably before they cause damage, to avoid losses.
Although energy efficiency for water pumps is yet to make sense in the GCC where the price of fuel represents a negligible operational cost, environmental concerns and anticipated government regulations on efficiency are expected to drive demand for energy efficient water pumps.
“Unlike in Europe and North America where certain energy efficiency standards must be met, in this region, the concept is just beginning to gain popularity as the pinch of oil gets felt, although the concept wasn’t popular in the past,” says Gomes.
“Because customers here tend to go for products that promise immediate benefits, it has been difficult for us in the past to promote the concept of energy efficiency with a promise of long term returns on cost. But we are glad it is picking up now and will certainly define future demand.”
Similarly, renewable energy powered water pumps, although already in use in developed countries are yet to gain traction in the GCC where this form of energy is at its infancy, but analysts are convinced that these types of products will be in full demand in the near future.
However, clients are now faced with a real possibility of paying more to buy water pumps in the near future if GCC countries finally implement the planned 5% VAT, expected to be rolled out next year. While industry players have welcomed the move saying that it would open up newer revenue streams for GCC governments, enabling them to spend on more infrastructural projects that would in turn widen business prospects, there is a hanging fear that the move might depress margins.
Cerovsky however says that there are newer verticals in the region that will sustain demand for water pumps, a situation that will help to suppress any fears of margins getting depressed. He points out district cooling as an industry experiencing rapid growth in the GCC and one that represents vast opportunities for water pump suppliers.
Water as a basic requirement of life will always be in demand regardless of prevailing economic conditions, more so in the GCC where desalination accounts for the largest portion of water used for domestic and municipal purposes. Holding back future projects for any reason might not be sustainable in a potentially water-stressed region due to population explosion. As KSB’s Cerovsky put it, water pump suppliers “are in the best business and in the right place to do it.”