Headwinds Ahead For Foreign Industrial Fluid Filter (IFF) Suppliers in China

This article is based on a GCiS multi-client market research report: China Industrial Fluid Filters Market Research Report.

Since China passed its Environmental Protection Tax Law in December 2016, its effects have reverberated across multiple sectors and industries. The amended law gave environmental authorities more power and promised harsher penalties for polluters. For instance, under the new law, authorities can detain company executives if they do not complete environmental impact assessments or ignore warnings to stop polluting. Industry players across different sectors have commented that the law and increased enforcement efforts have had significant impacts on their operations. In several market studies conducted by GCiS since early 2016, we found that a number of polluting facilities have already been told to shut down as they did not meet the new environmental standards. Others have chosen to move to inland provinces as part of their effort to take advantage of lower costs there and in part also to get away from the more stringent environmental protection rules and enforcement in tier 1 or coastal cities. For those who are still in the game, they often have to upgrade their sewage treatment systems to ensure that the pollutants discharged are within allowable limits. This has prompted growing demand in water treatment filters and systems.

Strengthening Environmental Protection & Growth in Demand for Industrial Filters

Water treatment filters belong to a larger category of industrial fluid filters (IFFs) which is often found in industrial systems or equipment used for filtration, separation and purification processes. According to a GCiS study, China’s IFF market had an estimated value of RMB 2,593 Mn and a total sales volume of 507,488 units. IFFs are used in a broad array of industries in China, with the largest one being the chemical industry. On its own, China’s chemical industry accounted for around 25% of all IFF market revenues in 2015.

Figure 1: Dominant End-User Industries for Industrial Fluid Filters in ChinaDominant End-User Industries for Industrial Fluid Filters in ChinaSource: GCiS China Strategic Research.

 

Growth Prospects for Foreign IFF Players by Industry

Slow Growth in Largest Segment. The chemical industry accounted for the largest share of IFF market revenue in 2015. But foreign firms captured only about 28% of market share by revenue. With a projected growth rate of 2.5% through to 2021, demand for higher quality filters is expected to increase because of more stringent environmental regulations and standards.

Urbanization & Town Planning will Generate Robust Growth. The water treatment sector accounted for 9% of total IFF market revenue share in 2015. Driven by a growing focus in city planning and public amenities construction, this sector is projected to grow at a CAGR of about 5.7% in the same forecast period. In the September 2016 round of PPP projects approved by China’s Ministry of Finance, the number of municipal works projects increased from 82 to 223. Of these, around 18% are sewage treatment type of projects – which is good news for industrial fluid filter suppliers. By end 2015, the market share of foreign IFF firms is already 40% - indicating that products of high quality and better filtration rates are pretty popular in this sector.

Figure 2: Share of Approved Public-Private Partnership Projects in September 2016

Share of Approved Public-Private Partnership Projects in September 2016

Highest Growth Segment. The agriculture industry makes only 8% of market revenue share but is projected to have the highest CAGR through to 2021, at 8.3%. At present, majority of IFF sales here are derived from water filters in the sprinkler, drip and under film irrigation systems. Foreign firms have only focused on the niche or premium segment of this sector because of their high price points, and so far they have a combined market share of only 17%. If they continue to compete only in the premium segment, they may not be able to profit from the rapidly growing demand amongst China’s smaller and fragmented agriculture sector.

 

Bright Future for the IFF Market but Headwinds Ahead for Foreign Players

The IFF market is estimated to grow at a CAGR of 3.2% through to 2021. Apart from demand coming from the water treatment industry, the agriculture and pharmaceutical are also expected to be key end-user markets with some of the fastest growth rates. But, competition is already becoming more intense in the already low concentration market. Most foreign suppliers of IFFs in the China market have been in the market since the late 1990s, but they are increasingly concerned with the growing capabilities and market position of domestic rivals. Because filter technology is relatively simple, it has not been difficult for domestic players to catch up, either by acquiring relevant technologies or simply building the capabilities on their own. As a result, many foreign firms are experiencing an erosion of their traditional market position and comparative advantage.

“Due to Chinese companies' continuous improvement in their filtration technology the market share of foreign suppliers is gradually becoming smaller.” 

–      Foreign IFF Supplier

Traditionally, there has been a simple pecking order in China’s markets: at the top, a small and premium segment is served by foreign companies who could attain solid margins; at the bottom, a large, low-end segment is served by local companies offering low-quality, undifferentiated products but are priced significantly cheaper than premium ones. It would be great for foreign companies if things remained that way, only that there is increasingly a rapidly growing middle tier, where more and more local companies have found a place in. In this middle tier, local companies offer ‘good enough’ products at competitive prices. With their good enough products and robust distribution and sales servicing strategies, they are now able to compete directly with more established foreign players.

"Most Chinese suppliers have already caught up with multinational companies in terms of technology since filters are not very complicated." 

–Domestic IFF Supplier

Growing Competition from “Good Enough’ Products

In spite of the growth in demand for higher quality products in some sectors, industry experts say that foreign IFFs suppliers are already starting to lose market share as Chinese IFF suppliers have made substantial improvements in their filter technology. With the slower economic growth these days, more customers are increasingly willing to accept slightly lower levels of product performance in exchange for greater cost savings. If the slower economic growth continues, we expect to see more sustained changes in end-users’ buying pattern and preference.