[00:00:00] Speaker A: These are massive firms, almost battleships of organizations and different business lines and divisions. And they've been at it for so long that they've accumulated a wide network that spans globally. And so together, they companies, they have over 6000 subsidiaries and affiliated companies that they have investments in. And as a result, they do wield a significant influence across a wide network of industries. Um.
[00:00:30] Speaker B: I am Reese Tizzle, and this is the future of water, in which we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 87. And as always, I know it's going to be a good one. Why is that? Well, because I'm joined today by Bluefield researches, Ethan Edwards. He's going to discuss some recent research on the role of japanese trading houses in water.
It's these firms, it's a unique group of firms, many of which are household names. They've made investments pretty much around the world in water, in every continent.
And their positions or their ownership stakes include everything from utilities desalination plants.
And as Ethan, I think, is going to discuss service providers, there's sort of a movement among some of them towards buying up some service companies. So, lots of really good stuff to talk about when it comes to global investments in water and what the role of, I think, eight, primarily eight japanese firms are doing around the world. So this is going to be good conversation. But before I do that, thought I'd share some news that caught my attention this past week.
So I was reading scientific american earlier this week and was interested to see an article on wastewater based epidemiology. The article, opioid crisis is now being tracked with wastewater by Betsy Ladashetz. If I pronounce that correctly, so shout out to her. But the article highlights another potential value to add to society from wastewater analysis. So, wastewater based epidemiology, what really started as a grassroots effort by academic researchers, and I guess in partnership with some wastewater utilities, really quickly became a nationwide surveillance system. A couple of years ago, it reached to the point where tens of thousands of samples were being collected, representing over 50 million Americans. I think by our last measure at Bluefield, CDC was supporting 37 states, four or five cities, a couple of territories to help develop wastewater surveillance systems in their communities. The primary focus was Covid. Truth be told, the CDC's estimates suggested that between 40% to 80% wide range, although could be a big number. 40% to 80% of people with COVID shed viral rna in their feces, making wastewater and sewage an important opportunity for monitoring the spread of infection. Being in Boston. That's certainly the case. Periodically in the Boston Globe, they would publish the numbers that would, you know, Covid is rising or it's falling to the lowest know since the outbreak, et cetera, et cetera. So really interesting. And like I said, lots of cities have been deploying these solutions. But in many respects, testing wastewater is a key indicator of public health, including potential operational and logistical risks to hospitals. That's not to be overlooked. So its value is significant. Many have already forgotten that. Really a critical approach to addressing Covid. While vaccines are important and really part of the solution, a big part of the solution was to flatten the curve so hospitals wouldn't be overwhelmed. So if you know any nurses or doctors who were working in hospitals at the time, and hopefully still are, they were being overwhelmed. I mean, that's why we were seeing images of people on gurneys and in beds and hallways at hospitals and in some cases, convention centers being opened as overflow from COVID So back to wastewater. Why do we care at Bluefield? The sudden reliance on wastewater systems really is a critical source of community intelligence. Has gotten utilities and policymakers thinking about what other data information our sewer systems can provide. Doesn't just have to be about COVID This ultimately, or the interest should ultimately drive greater investment into smart sewers, prompting us to kind of rethink how we even engineer design systems, including adding key access points for things like sensors and IoT and other solutions and tools, whether it be at the wastewater plant or even, maybe even upstream, throughout the collection network. Case in point, city of Laredo, Texas, recently partnered, I think, in the last couple of weeks, if not month, partnered with Massachusetts based Biobot analytics to understand illicit substances in the city's wastewater supply. Laredo is, I think, one of 70 communities participating in a program to sort of capture data that can inform a more proactive and effective public health approach to interventions, including a focus on opioid overdoses, hospitalizations, and ultimately, deaths. Right. To figure out what is that correlation? I think one of the challenges that policymakers do face is just a lag. And we all operate in the water sector as a whole. We operate in this environment. But like we said, data is available, technology is available. So why aren't we taking advantage of it? It can take six months or more to receive autopsy reports identifying causes of death. Hospitalization records can take over a year to reach city officials. So I think the goal is biobot is trying to provide more actionable, if not monthly, data that doesn't rely on individual. This is important, doesn't rely on individual access to people's healthcare records. It doesn't require, necessarily, permission. It just provides a pool of data that can be analyzed to understand where are the hotspots of trouble within a network or within a community. So this is really interesting to see what they're doing, because other applications to think about, like we've talked about schools before, we've talked to, obviously, Covid hospitals, you can look at prisons, you can look even at industry, look at meat packing plants. Once coming out of the meat packing plants and their wastewater effluents coming out, can it be monitored to figure out if there is a problem that exists or even emerging? So I think the case in point is wastewater is really taking a backseat to the water industry as a whole. Go talk to any wastewater utility operator out there and they always feel like they're sort of the back end of the line, no pun intended. But what if our collective wastewater could literally save lives from a number of different threats that exist today or maybe even come in the future? It just provides us better information that's data backed. We could be looking at things like nutrition, we can look at health, we can look at lifestyles. There's a lot of information that could, I'm cautious to say this, that can also be monetized. I think there's some really in that maybe a business model or approach that can help pay for this beyond sort of trying to figure out whether a city is going to do it or a public health agency, which I think therein lies. A big part of the problem is, who's going to pay for this? But the data, most importantly, could be invaluable. And the question is, do we care enough about it? So Bluefield's marketing team isn't going to like this, but I'm going to say it anyways. This is interesting shit. So, as you see things, whether it be on Bluefield's site, through our weekly newsletter, waterline, which you can always sign up for, we'll be taking a look at, continue to look at this, including the companies like Biobot, cando, and a number of other even bigger firms that are deploying solutions in this space. So there you go. I said it. Be on the lookout. And if you have any questions about wastewater based epidemiology, we've helped a number of clients in the space, not only in the US, but also in Europe and other markets. So, that being said, let's get to Ethan and talk a little bit about japanese trading houses and what they're doing around the world in water.
All right, so I'm joined here by Ethan Edwards. Ethan, I guess for everybody, might as well say it publicly on the podcast. Happy New Year.
[00:09:06] Speaker A: Happy New Year.
[00:09:07] Speaker B: Yeah, it's into January. And over the past, I'd say month or two, you and some others have been doing some research that I thought would be interesting. So given your role in water M A and company strategies, which is a service that you pretty much lead up in this case, you've taken a deep dive into japanese trading houses. Their roles in water, where they are, what they are, how they're doing it. So let's sort of start with the basics. Who are these firms? Give us a little bit of background about these companies, then we can dive into some of the more other details.
[00:09:43] Speaker A: Yeah. So for us, we've covered and profiled the eight main japanese trading companies. And so in Japan and different parts of the world, they're also known as Soga shosha. And so these companies are Mitsubishi Corporation, Mitsui Corporation, Hitachi Corporation, Itochu Corporation, Sumitumo Corporation, Marbeni Corporation, Toyota Susho and Sojits Corporation. So a lot of corporations will just refer to them as their first names today, hopefully. And they're really massive. Between the eight companies, they reported nearly $600 billion in assets under management last year in 2023. And so at a high level, there are two main parts of their businesses. One is the general trading side where they act as a supplier and wholesaler distributor. And the second is as the organizer of large scale infrastructure projects. And in some cases, these firms, they also sort of function like private equity investors almost through their investment arms, where they invest in areas crucial to their trading supply chains. And on the infrastructure side, sort of at the same time as when they began diversifying to outside of Japan, they began to have success in forming and leading major infrastructure projects. And that was in part due to them being able to apply their historical trading expertise of using information, logistics, finance, risk management and bringing that all together from trading to infrastructure.
[00:11:21] Speaker B: They're massive. And I think what they have done mean they have been diversifying. We've looked at them, I think even in the early days of Bluefield we were looking at know, I think primarily around their DSAL and such. But let's jump to, I guess the question is, and this is something even internally, when we were talking about this as a potential research topic, why have we decided to look at these companies?
[00:11:48] Speaker A: Well, the trading company is their group of companies unique to Japan, in part due to their huge size and sophistication and oftentimes it means they flock together when they're going towards different investments. And another interesting thing is overall, it seems like they're little known in some different parts of the world, the United States, for example, because their names aren't found on traditional consumer goods and services. So, for example, Mitsubishi Motors isn't the Mitsubishi Corporation. And so for the eight companies that we looked at, for the most of them, in the mid to late 2000s, water emerged as their next big investment target. And that was in large part due to the different industrialization trends, urbanization boosting the need for clean water around the world. And so since then, the firms have acted as significant project developers and investors in water, and they've built out these global ownership stakes in big treatment and desalination projects. In total, we've tracked around 82 major international water investments since the year 2000.
[00:12:56] Speaker B: All right, so let's dig into the details, because I think you've even gone to the extent you can project by project or asset by asset is a better way to put it. So how are they strategically positioned? How do they differ from one to the other, whether it be company by company or even regionally? Are there certain areas of focus? What's the background on that?
[00:13:18] Speaker A: Yeah, so we have gone project by project. And so, of course, there are going to be a few outliers to these generalizations and trends. But a couple of things that we noticed in the trends we pulled out is that over the last 20 years, the majority of their projects, around 67%, were asset focused. So that was where they were completing projects related to building or upgrading a major treatment or desalination plant. And that's clearly where they are the most experienced, I would say, in water thinking. Geographically, they are mostly heavily involved in emerging markets, in markets that have a growing middle class. So thinking outside of Japan as a domestic market for them, they have a lot of focus in the Middle East, Latin America, specifically, Chile, Peru, Mexico and Brazil, to name a few, and then also Southeast Asia. And interestingly, is for the most part, they've also stayed out of the mostly crowded United States market.
And then looking through the companies and sort of thinking about their involvement as trading companies as a whole, I would say it's interesting to see the parallels in their involvement in water to their growth as general trading companies. So the trading companies, when they first were formed in post World War II Japan, they primarily did general trade without ownership in the import and export of goods. And then as they moved on, they began to take more direct investments in their supply chain. So they were starting to invest more in manufacturers and upstream raw materials, such as minerals and even energy development. So they're basically protecting their competitive advantage in a whole slew of industries, whether it's textiles, automobiles and energy. And so going back to water, I think that it's a similar evolvement. The company started out more with the background role, whether it was the organizing or the EPC side of these large infrastructure projects. Then they began to take on more financial and operational stakes in the projects that they're developing. And then finally, more recently, we've seen them sort of round out their approach. They've taken more investments in utility services and even product and service focused companies. So, similar to trading, where they began to start seeking vertical integration, it really looks as if they've done the same in infrastructure and water as well.
[00:15:46] Speaker B: Yeah, I think it's really interesting to sort of see. I mean, we talk about it internally. I mean, these firms, they're like battleship groups. They don't move super fast, but they lay out long term strategies and then they start directing sort of consolidated approach towards whatever the target area or segment is. And I think, as you mentioned earlier, the other unique thing about these firms is birds of a feather flock together. I mean, they all kind of do navigate in similar channels, as I mix metaphors here. But one thing that comes up, I mean, it's worth mentioning, partly because I had Keith Hayes on, it seems like recently, but it's probably several months ago, we were talking about the UK market and Tim's water. I know if I recall, that they've historically at least invested in private utilities. The UK market is basically the most privatized water utility market in the world. But there are a lot of questions coming up now. So what's their role? If their strategies or positions in the UK market changed at all?
[00:16:56] Speaker A: Yeah, well, interestingly, they're primarily, mostly all out of the UK market.
They did take stakes starting in the early 2010s, but it seems recently they've been rushing for the exits. Most recently, or actually earlier this year, in 2024, it was announced that Sumitomo and its partner, Osaka Gas, each one of them held a 50% stake in Sutton and East Surrey water, were selling that business, and they reportedly put that business up for sale in February of last year, 2023, sort of around the same time that a lot of these different UK water companies started to face growing criticism over their operations and costs. So it was reported that neither company wanted to invest in those businesses and put equity into them, so they decided to put them up for sale. And it was ultimately picked up by the penning group.
So the company Sumitomo, they've basically said that they're working on reevaluating their business portfolio under their midterm management plan. So it'll be interesting to see what that means for them and their water investments going forward. And then circling back to the UK, Itochu was another company that sold their stake in Bristol Water in 2021 and the only company left that we know of is Mitsubishi and they're the only ones that have a minority stake. They hold 25% in South Staffordshire water but from what we can tell that's a very passive investment. They don't have any members on the board, it's operated by a different company.
[00:18:29] Speaker B: As I think you know the UK market is in a bit of turmoil. One, it's public pushback on private ownership, so that's sort of ongoing. The other aspect of it is the UK economy is facing headwinds for a number of different reasons, whether it be the euro, whether it be energy prices, all of the above. So it'll be interesting to see how that unfolds even further. And the UK market deserves its own analysis in its own right, maybe even in know back to sort of the role these companies mean. What role do these japanese firms play in driving technology advancements or innovations in water? And maybe even what role does this play in or contribute to their sustainable development?
[00:19:19] Speaker A: Yeah, well as you've mentioned that these are massive firms, almost battleships of organizations and different business lines and divisions and they've been at it for so long that they've accumulated a wide network that spans globally. And so together they companies, they have over 6000 subsidiaries and affiliated companies that they have investments in and as a result they do wield a significant influence across a wide network of industries. And so I would say that's meaningful in two main ways. So one is that the companies have started and have built out their own water product and solutions offerings. So Hitachi, Mitsubishi and Marbeni stand out there. They have their own in house capabilities for decentralized desalination systems, pumps, treatment chemicals and water data solutions on the digital side. And then second, since they have so many of these different subsidiaries and affiliates, their corporate focus at a high level can be a driver for water reuse and efficiency solutions. So we've started to see them begin to implement water management plans across their different manufacturing sites, especially in the ones that are in areas with higher water scarcity. And to me where this is most interesting is when it impacts the supply chain of their own trading company. Businesses like materiality of it. So, for example, in copper mines in Chile, both Mitsui and Mitsubishi are investing in major seawater desalination and major pumping projects to defend against drought conditions there.
[00:20:58] Speaker B: Yeah, I think it's really know, it's been so long, I guess I can say it now. I remember working with Marbaney, they used to own osmoflow. At one point they were out of Australia, membrane company, and they were looking at the water, you know, looking at that technology. And then to your point about sort of Latin America, particularly South America and mining, we know those companies. We've worked with a number of these firms trying to figure out what those market landscapes look like and how they're growing and what technologies and or what other companies are active in those markets, both from a competitive landscape, but also potential partnerships, which maybe that's a good segue, is that. I guess my last question for you is are there any notable collaborations or partnerships worth mentioning, whether it be local or international, in the water sector? Because like you said, they make a lot of minority investments, some 50 50 or even majority, but across the board. So are there any partnerships that are worth calling out among these players?
[00:22:04] Speaker A: Yeah, definitely a lot. And especially in recent years, we've seen a lot more partnerships, it seems. And to me that sort of reflects their company desire to adapt to recent change, whether that's in AI, smart grids, hydrogen, all these new technologies that we hear about all the time, and that's sort of been reflected in their midterm management plans and state investment goals. So a couple that were interesting, just to name a few, is recently Marbenny launched an AI pipeline deterioration project in Japan. And so depending on the success of that, they plan to roll out AI to their own water concessions businesses elsewhere, such as in Portugal.
Hitachi has a partnership with Curita, a publicly traded company, to pursue climate resiliency related projects. Mitsui, one of their subsidiaries in Mexico, is trying to integrate biogas in their major water treatment plants. And we've seen partnerships with countries on a country level as well. I guess with a new entrant to the waterfield in Toyota Susho. They first took their first water stakes in 2021, very recently, and they have a memo of understanding with the Republic of Angola's ministry of energy and Water. So really a wide variety of partnerships, both private, with localities, and more even like on the country level. So it'll be interesting to see how these different partnerships play out going forwards and what that means for mean.
[00:23:38] Speaker B: One thing I saw that you put together was just a global map of all the positions these firms have around the world. It's interesting to see that. And then I think one last thing is you noted, or have noted, and that is they all have their own sort of sustainability goals themselves. And so water does play a role in that as well. So it varies across the board. But this is really interesting stuff. Like I said, for me, it brings back memories. We used to spend fair amount of time in the early days of Bluefield looking at these firms and we've been working with them over the past decade. So it's interesting to see what they're up to, at least empirically, in this data set. So thanks for sharing some of this. Really interesting. And it's not the last question. So my last one for you, in addition to thanking you for sharing this is, what else is on your agenda? What's coming forward?
[00:24:41] Speaker A: Well, we'll be looking to repeat the same sort of analysis for different peer groups going forwards. I mean, we've done in the past and I think we do a really good job at it, but we'll likely revisit some spanish engineering firms at least first to start out and then we'll go from there. And then we've also got a lot of interesting research coming out on the energy transition side of things with biogas strategies and green hydrogen as well in the pipeline. So stay tuned for.
[00:25:09] Speaker B: Nice. Look forward to all that. Yeah, you're right about like spanish engineering. We've talked about a number of these sort of buckets of players and that is a key focus of ours this year, which you and I and others are going to be, I think, talking a little bit about that in more detail later today. But that being said, I will let you go on a cold and rainy Friday and maybe enjoy the weekend. So that being said, ethan, thanks a million for stepping up. Appreciate the time.
[00:25:39] Speaker A: Sounds good. Stay warm.
[00:25:41] Speaker B: All right. Take care.
All right. That was fantastic. So Ethan is a wealth of information, particularly when it comes to company insights. That's one of his key areas of focus. I know he's been released, also started, which he didn't even mention. Every quarter he goes through all the public filings of the top publicly traded companies in water to analyze one. What are they all talking about? What are their water revenues? How are their businesses changing everything from stock prices to M A to new investments, et cetera, et cetera. So always good to have them on. A couple of other things to add one, I just want to give a shout out to Mike Gaylor. Thanks, Maine, for continuing to produce the future Water podcast. Always a big help because it takes team effort and some people get more credit than others. And Mike is one deserving of credit. So happy New year to Mike and once again, just let everyone know it is a new year. Things are already picking up. Can't tell you how busy our consulting pipeline is. It's pretty massive right now, so if you are interested in that, don't hesitate to reach out. We help a number of different companies like I already mentioned, even the japanese trading houses. But also we're planning to be in a number of places in the next month or two. So we will be at the WEF, AWWA, UMC, or utility management conference in Portland, Oregon in February. Eric Bendler Steph Aldock will be there from the Bluefield team. I will be at corporate water industry update in Austin, Texas on the 20 February and then I think Chloe Meyer from our Europe team will be in London for world water tech the 20th and 21 February. So if you want to meet with Chloe and talk about Europe and technology innovation, she will be there. I will be in Costa Rica at the PVC, the Unibell conference, the 50th annual meeting in Costa Rica, speaking to a number of companies there. I think that's somewhat a closed event, but if you happen to be in Costa Rica, I'm always happy to hang out. And lastly, water reuse symposium. It is coming up. And then recalrato 11th to 14 March water reuse we've been looking at this for a better part of a decade as well in the US, but also we just put out a Europe reuse report that might be of interest as well. So lots of good stuff when it comes to reuse. And at the very least Isabel Kezman will be there because I know she's presenting and there might be some other members of our team as well. That being said, before we sign off, if you're in Boston or Barcelona or anywhere else where we are, just let us know. We'd enjoy the opportunity for a meeting. You can add Paris to that list, you can add Chicago to that list, you can add San Francisco to that list, because that's where we are all the time. Please subscribe to future Water podcasts and give us review. It's really helpful. I can't tell you how helpful it is. All you got to do is just click a button, particularly if you're an Apple podcast. To that point, it looks like Google is getting rid of Google podcasts. So if you're using Google podcasts, they're once again changing their approach to podcast. I think they're all moving it to YouTube, so keep that in mind. But you can always definitely find us on Spotify and Apple podcasts.
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