By SanZen

A Peek Into the Chinese Water Sector

China’s water resources are scarce, poorly distributed, and heavily polluted. To address this dire water situation, the Chinese government has set water protection as a priority over the next decade. Environmental protection is widely expected to be the core theme in the upcoming 13th five-year plan that will guide Chinese policy between 2016 and 2020. As policy shifts, this is driving strong private sector interest. Foreign companies that are able to provide the required technologies and know-how are in high demand in this lucrative market.

As China battles with unevenly distributed and heavily polluted water, water management and water treatment systems have taken centre stage. This article provides a brief introduction into China’s water and discusses key opportunities for foreign companies in related industries.

An uneven distribution of water

China is the 3rd largest country in the world with an area of 9.7 million km2, and a population of 1.4 billion people. Yet, it only possesses 6% of global fresh water resources.

Not to mention, the distribution of water resources in China is unbalanced. 80% of China’s fresh water is located in Southern provinces. Meanwhile, major Northern cities in China such as Beijing are located in drought-prone regions that are suffering from severe desertification.

The Chinese Ministry of Water Resources notes on their website that out of 663 China’s largest cities, more than 400 are suffering from water shortages. The situation in 110 of those 400 cities classified as ‘severe’. In 2013 it was declared that more than half of China’s 50,000 rivers had completely dried up in the last 20 years. It is therefore no surprise that the government has made water conservation and treatment top priorities, which runs alongside their action plan to deal with ‘air pollution’.

Cue massive government infrastructure project. The Chinese government are in the process of constructing the South-North Water Transfer Project. When completed a series of three canals will transport water over 1,000km, the first of which began transporting water in 2014.

Water pollution is the new smog

Rapid urbanisation and China’s focus on economic growth has come at the expense of the environment. The majority of water sources are polluted, and it’s really not a good idea to drink water straight from the tap in China.

Water pollution in China has increased tremendously over the last three decades, penetrating coastal waters, inland water bodies, surface and groundwater sources. According to Chinese Ministry of Environmental Protection, 39% of China’s rivers and 26% of key lakes and reservoirs are polluted. With a lack of other options, groundwater has become a key water source but now even that is 60% polluted.

The World Bank estimate that 10 countries are home to almost two-thirds of the global population without access to ‘improved water sources’. Top of the list is China, with 108 million people.

The crisis engulfing China does have a silver lining; foreign companies have the opportunity to make a difference in China’s battle against depleting water sources and pollution.

Will China’s water ever improve?

The upgrading of the water sector was earmarked as one of a number of priorities in the Chinese government’s 12th five-year plan (2011-2015). The 13th five-year plan, due to be released in late-2015, is set to place domestic environmental protection as the absolute top priority for the Chinese state in the near future.

The Chinese central government acknowledges the severity of the issue and has taken a number of measures to tackle the problem. 20 major anti-pollution laws, numerous regulations and the establishment of the Ministry for Environmental Protection in 2008 are examples of initiatives the government has organized in order to reduce overall pollution. The new five-year plan is expected to build upon these standards.

China’s 12th five-year plan aims to increase investments in the wastewater treatment sector by 17%, with investment targets set at USD 71 billion. Of the investment targets, about 60% is earmarked for expanding and improving the pipeline network while the remaining amount is to be used for wastewater treatment and sludge treatment facilities. Coming to the end of this five-year period, both the number of wastewater treatment plants and total capacity has increased dramatically.

The Chinese government is not only trying to increase the supply of quality water, but also attempting to slow down the increase in water demand through conservation and efficiency measures. Between 2011 and 2021 the government is expected to spend $612 billion on water conservation. What is clear is that China won’t have good water for a considerable amount of time, and in the meantime there are opportunities for foreign companies to provide solutions.

Five key water-related opportunities for foreign companies

Due to rapid urbanisation, industrialisation and an increasing awareness of environmental issues, foreign companies will find a number of enticing opportunities in China. Below are five key areas currently experiencing high growth that is set to continue. These industries are very different but all demand similarly advanced technology, these are: residential water treatment, wastewater treatment, water reclamation, sludge treatment and disposal and piping network construction.

 

Five investment areas based on China’s 12th five-year plan
Residential water treatment Taking the water treatment process into the home of the Chinese consumer. Products include point-of-entry and point-of-use, and encompass a range of technologies.
Wastewater treatment facilities Advanced technologies to monitor and manage water distribution.
Water reclamation  Cleaning wastewater using biological and chemical treatment so that the water can safely be returned to the environment.
Sludge treatment and disposal Sludge produced during sewage treatment to be managed and disposed.
Piping network construction Construction of water supply pipe network.

 

Let’s focus on residential water treatment and wastewater treatment.

Key opportunity one – residential water treatment:

With tap water polluted, other solutions are needed to provide potable tap water. Despite increased attention and investment from the government, it is still unclear whether any tangible improvements have been made. People need a source of potable water, and three key factors are fuelling growth in in-home water treatment devices:

  • High levels of pollution with no short or mid-term solution
  • A population that is increasingly educated and aware with regard to health and water-related issues
  • Continually rising living standards and income levels

Just as development has affected China’s water sources, it also bears huge influence on the ways in which Chinese residents have sought clean water. As the Chinese population becomes increasingly affluent and aware, their preferred solutions to their water problems are changing.

Nowadays, three distinct solutions have emerged which all offer potable drinking water of varying degrees of quality. Not long ago boiling water to make it potable was the only option. Then, bottled water (including 5-litre dispensing units) emerged to offer an alternative. It is only in recent years that a third option has emerged in the form of residential water treatment, which treats water as it enters the home (point-of-entry) or leaves the tap (point-of-use). To read more on the evolution of drinking water sources in China, please click here.

Traditionally, those seeking these residential water treatment solutions were residents in China’s wealthier coastal provinces. However, sales are no longer confined to tier-1, or even tier-2 cities. Unlike before, many foreign manufacturers of residential water treatment are now distributing in the majority of China’s provinces. It is possible to do this without a wholly owned foreign enterprise or joint venture, but instead through using a network of distributors to sell around the country. Want to understand who is buying residential water treatment, and where they are in China? Click here.

Recently the market has been growing at approximately 20% annually but penetration rates of such devices remain low. With such potential, the market is forecast to reach a value of approximately $20bn by 2019. For a quick introduction into the residential water treatment market in China, please click here.

Many Chinese consumers are willing to pay a premium for a foreign brand, which can often be as high as 300% or 400%. Foreign companies not only entail ideas of quality and modernity, but also are more trustable in the eyes of the Chinese market.Thus, leveraging your foreign brand name is a crucial component to your success in China particularly if your products are retailing at a significantly higher price than many domestic products.

For more comprehensive information on the Chinese water industry, please see our resources here.

Key opportunity two – wastewater treatment:

Between 2011 and 2015, the Ministry of Water aims to upgrade 2,000 water plants as well as build an additional 2,358 water plants to meet the demands of the country’s growing population. This represents opportunities for both domestic and international companies active in the water technology sector.

Right now, we’re in a transition period between two five-year plans. It’s still not clear whether targets will be able to be met by the end of 2015. At the same time, new reforms such as the Water Pollution Prevention & Control Action Plan are coming into place. This one policy alone is backed by $320 billion, and takes a more comprehensive approach by managing entire river basins rather than select polluted water sources.

One of the goals in China’s 12th five-year plan is to invest more than $4.5 billion in new technologies, services and solutions. Hence, companies possessing advanced technologies and know-how in this sector can provide valuable services to the government.

According to a KPMG report, China’s National Development and Reform Commission encourages foreign investment in the urban water treatment plant sector, hence there are no maximum shareholding restrictions in this category. In 2015, it was announced that China would open up water markets to foreign investors even further primarily in an attempt to tackle water shortages.

Smart water technology such as communication infrastructure, water meters and analytics software, is providing foreign companies with opportunities. By 2023, Chinese smart water infrastructure investments alone will exceed $10 billion USD, up from less than $500 million in 2013.

In order to gain an understanding of the various opportunities in the wastewater treatment industry, SMEs must look closely at the legal conditions and the niche markets existing in China. In Northern China, where there are severe water scarcity problems, water reclamation is desperately needed. In 2014, Beijing completed 14 water reclamation plants and began construction on another 16. Nowadays, around a quarter of water drank by Beijingers is reclaimed water. This is part of $3.6 billion investment by 2015 to realize a reclamation capacity of over 10 million tons a day.

Chinese Professor Wu, an expert in water treatment says that foreign companies “are much more experienced – and Chinese authorities trust them”. He continues to say that domestic players are finding the going tough because international rivals offer a similar price level but much greater experience in handling large projects.

The water issues that China faces will not resolve themselves overnight, and in the meantime foreign companies are in a unique position to provide solutions in various sectors. Many foreign companies are participating in China’s water-related industries as we speak. Doing business in China is easier than ever before. Nowadays, you don’t need a wholly owned foreign enterprise, joint venture or even a representative office to do sell your product in the Chinese market.

Get in touch to find out more about how we can help you in China.