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Looking Forward and Back--The New Environmental Industry.

No one would dispute that the environmental industry has changed substantially in the last ten years. But the exact nature of that change, and the shape of the altered industry and the instrument market it supports, have proved difficult for instrument makers to pinpoint and adapt to. One thing is clear now: the change in the environmental market is not a temporary cycle, but a true metamorphosis. The main thrust of this change is a shift away from a market driven primarily by regulation and enforcement toward one that responds more to the economic advantages of more proactive and long-range environmental thinking. This transformation is ongoing, however, and it is far from complete, which makes it very hard to clearly define exactly what the environmental market is. Some parts of the industry have already evolved into an entirely new approach to environmental accounting, while other segments remain mired in the past and have yet to achieve the most basic compliance. The halcyon days of the environmental market, at least in developed countries, were the late eighties when governments, having created rafts of new environmental legislation, began to enforce them in earnest. Testing was mandated, the regulated community regularly read headlines of huge fines and scurried to comply, and testing labs flourished. The industry, it was thought, was recession-proof, being fueled by regulation, and there were high hopes that the gravy train would continue for a long time. But the recession of the early nineties brought the industry back to earth as it became clear that, regulation notwithstanding, economic prosperity is important to progress in improving the environment. The environmental market matured extremely rapidly, leaving the landscape littered with bankrupt labs. The survivors are now working for much lower prices and profit margins that are close to microscopic. Although instrument makers have been hurt by this startlingly rapid maturing of the environmental industry, the fact is they have actually done considerably better than most other segments of the industry. The accompanying graph shows how analytical labs have fared in comparison with instrument sales to the industry. While analytical service revenues declined between 1991 and 1996, instrument sales managed to increase regularly, albeit slowly. It's important to note that the decline in analytical services revenues doesn't necessarily indicate a decline in the amount of testing being done, which undoubtedly did not decline, but actually increased during this period. The decline is due to several factors including rapid erosion of prices labs could charge, shifting of testing into in-house operations at regulated companies, the increased use of preventive measures and monitoring techniques that obviate the need for testing, fewer new regulations, and a perception of softening enforcement. The US Department of Commerce Office of Technology Policy, in a report published in October of 1998 entitled Meeting The Challenge explains the new environmental market by breaking it into three categories of regulated companies. There are the "traditional" customers who respond to a "command and control" approach and whose environmental policy is based on fear of regulatory enforcement. This remains the largest sector of the market, but there is a gradual increase in the number of companies taking the other two approaches, which DOC terms the "transitional" and "advanced" approaches to environmental policy. According to DOC, the "transitional" companies "have begun the process of making decisions that optimize economic and environmental decisions or simultaneously consider economic and environmental factors, and they consider a wider range of options, including some that reduce waste and the generation of pollution." This group, in other words, has begun to think more proactively about environmentalism in something similar to the ways many companies have come to view spending money proactively to keep their employees healthy as an economical alternative to the greater costs of lost productivity and higher medical expenses. DOC says companies in the "advanced" category "make profound shifts in their organization...They integrate environmental factors in their decisions more fully than other firms, adopting advanced production processes and product designs that are economically and environmentally advantageous. They regard productivity and technology as key drivers of manufacturing strategy, invest more in process and product R&D, and make greater use of quality-based strategies." For instrument makers this creates the conundrum of a market with customers that are so different that they require completely different strategies and products. The traditional environmental testing market will be looking primarily at instruments to perform government-approved tests more efficiently. The main considerations for these customers will be cost of ownership and cost per test. The transitional and advanced companies, on the other hand, will be taking a more far-sighted view and will be looking for new technologies to increase productivity, and will be considering environmental performance as an important factor in doing so. These companies may well use substantial amounts of instrumentation as they pursue their alternative approach, but it may not be the instruments that are usually focused on the environmental market. These companies could present substantial opportunities to innovative instrument makers who can provide them with solutions that circumvent or reduce the need for regulation. The problem here is that this is not presently a clearly defined market with customers who know exactly what they want. It could require a real pioneering effort on the part of the instrument maker. Perhaps the most damaging effect of the changes in the environmental market- at least as far as the traditional market is concerned- is that it has created an environment where investing in developing new technologies is extremely uninviting, since technologies that are controlled by regulation must go through lengthy and extremely complex approval processes before they have a chance of bringing a profit. This hurts the environment, the regulated companies, and technology vendors. Government agencies in the US and elsewhere are moving in the direction of simplifying the ways new technologies are brought into the environmental market, but progress has been slow and the impact so far has been negligible.

The traditional sector of the environmental market is expected to continue to grow slowly. There is hope for geographic expansion as developing countries implement environmental regulations, but the extent of their implementation will remain closely tied to their economic prosperity. The traditional market will remain the province of well ensconced companies whose products have gained government approval and who already have strong market share positions. As this situation changes slowly and companies and governments shift their environmental policies, new opportunities will arise, but they will generally carry substantial risks and will require a lot of effort on the part of instrument companies.
Line Graph: US Environmental Industry Sector Revenues ($b)
 1988 1989 1990 1991 1992 1993 1994 1995 1996
Instruments & Information Systems 1.3 1.6 2 2.3 2.6 2.7 2.9 3
Analytical Services 1.2 1.5 1.5 1.6 1.4 1.4 1.3 1.2 1
Data Source: US Department of Commerce
Line and Column Graph: US Market for Environmental Instruments and Information
Systems--Sales and Growth Rates
 1988 1989 1990 1991 1992 1993 1994 1995 1996
Revenues ($b) 1.3 1.6 2 2.3 2.6 2.7 2.9 3 3.1
Growth (%) 19.0% 21.0% 15.4% 11.8% 6.0% 4.6% 5.7% 4.2%
Data Source: US Department of Commerce

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Comment:Looking Forward and Back--The New Environmental Industry.
Publication:Instrument Business Outlook
Geographic Code:1USA
Date:Jul 31, 1999
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