The fast-paced industrialisation over the past few decades, across the globe, has undoubtedly led to overall economic growth and improved living standards. However, a serious side effect of this industrialisation is a damage to the environment, through “pollution” which is caused by either reduction in forests cover or air-water pollution, etc. This leads to environmental imbalances and has a huge bearing not only on the health and the lifestyle but also on economic growth. World leaders have identified this issue long ago and set their impetus on environmental management. Thus, the environmental consulting industry came into existence which is now close to US $30 billion globally.
The environmental management companies provide services including assessing, monitoring and remediating environmental impacts to surface water, groundwater, soil and air. The industry has been thriving in developed economies since the 1960s and has witnessed strong growth till late 1990s. However, developing economies have recently diverted their attention towards environmental protection.
Governments in developing countries and corporations operating in these nations are two key customers for environmental consultancy services providers. The industry is highly fragmented marked by low entry barriers with low capital and intensity of technology. A high fragmentation is on the account of different specialised services offered by distinct small players in the industry leading to intense competition. Therefore, it becomes imperative for industry players to understand and analyse key drivers within the industry to stay competitive in the market.
Three key industry drivers:-
- Contract opportunities: The industry mainly depends on spending by governments and corporations on environmental projects and derives its revenues by executing such contracts, higher the value of contracts in hand, higher is the revenue earning potential.
Televisory’s analysis of the top players in the developed and developing economies reveals that order book growth has slowed down in developed countries over the past decade. This is because of mature policies impacting revenue growth of companies operating in these markets. The players operating in developing nations have witnessed healthy order book and consequent revenue growth over the same period. This is supported by increased public and private sector focus towards environmental issues on account of policy push as well as trade requirements. These have been imposed by developed nations and are due to increased awareness among corporations and people in general.
The companies operating in developed countries registered a healthy revenue CAGR of 17.8% during 1996-2005, the growth was muted during the past decade i.e. during 2006-2015. On the contrary, the companies operating in developing economies registered a healthy revenue CAGR of 17.6% during the past decade.
Chart 1): Average Revenue for Environmental Consulting Companies- Developed Countries (Tetra Tech Inc., RPS Group PLC, Arcadis NV, CH2M HILL Cos Ltd, Original Engineering Consultants Co Ltd)
Source: Televisory’s research
Chart 2: Average Revenue for Environmental Consulting Companies- Developing Countries (Taiwan Environment Scientific Co Ltd, Progressive Impact Corp Bhd, Beijing Geo Environ Engineering & Technology Inc.)
Source: Televisory’s research
- Cost efficiency and profitability: As environmental consulting projects are awarded on competitive bidding, companies face pricing pressure amidst steep competition, thereby impacting the profitability of the players involved. Moreover, accurate cost assessment while bidding and cost management efficiencies thereafter define superior operating profitability for players in the industry. The operating margins of companies in developed economies have remained under pressure at around 6% during most part of the last decade (barring later part of the decade where operating margins improved slightly, but still continue to be in single digit). On the other hand, companies operating in developing countries enjoyed superior operating margins during the past decade. However, with the increase in competition the supernormal operating margin in developing economies is on a continuing decline, but, still continue to remain much higher than in maturing developed economies.
Source: Televisory’s research
- Order book diversification: Order book composition i.e. how well the order book is diversified across different types of services, industries served and customer category (public/private) also have a huge bearing on operating profitability of environmental consulting service providers. Generally, companies offering diversified and customised services to varied industries across public and private sectors enjoy higher margins. This fact was substantiated through improved operating margins for the companies operating in developed economies despite a decline in revenue during 2012-2015.
Although large players from developed nations are entering developing countries as the growth potential is high in such regions, in the near future. The pace has been slow on account of high entry barriers in the form of varied regulatory requirements and policies in different countries. Ultimately, rules of the game do not change irrespective of the type of market one operates in. What changes and defines success is one’s ability-efficiency to adapt to changing customer needs. Thereby, offering customised services, accessing; managing costs efficiently and facing competitors head-on.
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