(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thinking and outdated regulations that prescribe a focus on post-pollution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 government/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.
Outlook
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—especially
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.