Diversification Helps H2O Innovation Make a Splash Around the World


Diversification Leads to Global Success for H2O Innovation

In 2009, when much of North America was slogging through the Great Recession, one Canadian company in the industrial water treatment business responded by diversifying. Quebec City-based H2O Innovation had established itself as a leading designer, manufacturer and builder of water treatment systems in Canada and the United States, and had tried its hand at building systems in other countries around the world. As the economy tanked, there was no way to know whether those large, complicated projects would continue to keep the company busy.

By purchasing a small California company that manufactured and sold specialty products and chemicals used in water treatment systems, H2O Innovation was able to launch a product division in 2009. Suddenly, it had an easier way to move into other markets around the world.

The company's willingness to be innovative by adding a new product line has translated into great success: In the six years since launching its product division, H2O Innovation has grown the division from zero revenue to now cover 90 percent of the company's fixed costs. The product division, which earned US$200,000 in 2009 was responsible for US$18 million in 2014.  The company finds its international buyers mostly through networking at trade shows and building relationships in its industry, says Marc Blanchet, vice president of corporate affairs at H2O Innovation.

H2O Innovation's willingness to diversify and expand in international trade has transformed the company. Although the company has experienced ups and downs in doing global business, it continues to build highly respected water systems while also selling water treatment products in 40 countries around the world.

The H2O Difference

Like most internationally successful companies, H2O Innovation understands the qualities that set it apart from the competition—its Global Competitive Advantages—and how to capitalize on them. One of the company's most important differentiations is its skilled executives: Not only do its executive team members have prior international experience, but the company is known for the high quality of its water systems, which results in a deep understanding of how water systems work.

"The system we build is our flagship; it's very high-end equipment" says Marc Blanchet, vice president of corporate affairs at H2O Innovation. “The project business is not our most profitable division, but it is very synergetic with our service and products division. Our experience building those systems provides us the credibility to service the customers and keep the long term relationship."

That expertise in building water system projects gives it knowledge that carries over into the product business. For instance, H2O Innovation customers could purchase couplings, devices for connecting parts of machinery, from a number of suppliers. “It may seem like a very simple product, but desalination needs a certain type of stainless steel and not everyone understands those requirements," Blanchet says. “That's the added value we bring. "

Instead of following tradition, H2O Innovation disrupted the industry by committing to an “open source approach," Blanchet adds. Traditionally, water system designers and builders used only their own proprietary manufactured components in the system. When components must be replaced, owners are “stuck with golden handcuffs," unable to take bids for better priced replacement products, Blanchet says. “Our customers can use other parts when they need to replace components. If they need a new membrane, which is the heart of the system, they can bid it out."

International customers appreciate the freedom H2O Innovation systems offer, and that innovative approach to business has become one of the company's Global Competitive Advantages.

Overcoming International Challenges

Growing a business globally isn't easy, and H2O Innovation has experienced its share of challenges along the way. The company first branched out into the international market through its project business and began designing and building water systems around the world. While H2O Innovation successfully completed projects in the United States and Mexico, undertaking similar projects in Russia, India, Northern Africa, and the Middle East was more difficult because business is conducted differently in each country and region. “We realized it's very difficult to do projects around the world because you need feet on the ground; you need a presence in the area," Blanchet says.

In 2009, H2O Innovation undertook a joint venture in India, but working with a local partner was even more problematic. “We thought that having a local partner was the solution, but we underestimated the difference in values and ways of doing business," Blanchet says. “We needed someone there to represent our interests with the local partner."

H2O Innovation left that partnership in 2012 and decided to focus its project business in North America and expand by ramping up its product business in the rest of the world. “Undertaking a project around the world is difficult, but sending a product is easier," Blanchet says.

In addition to challenges inherent in dealing with different business cultures across the world, H2O Innovation also deals with the financial issues that accompany international business, such as differences in payment terms. For instance, North American distributors usually pay for H2O Innovation products within 30 to 45 days, but distributors in other countries often need much longer.

 

To reduce the risk involved in such lengthy payment processes, H2O Innovation subscribe to insurance on its receivables. Such insurance policies also allow those receivables to be included in the calculations for the company's operating line of credit, Blanchet says.

Because financial practices and business cultures vary in every country in which H2O Innovation works, having a financial partner with deep experience around the world has been crucial, Blanchet says.

“With HSBC, we have access to the bank's worldwide network and a chance to have local consultants around the world," he says. “My local HSBC contact can put me in touch with [an HSBC contact] in Egypt, or anywhere, who can explain how things work in that area. In Egypt, for instance, the HSBC contact explained that we can't get payments up front without getting a payment bond."

When H2O Innovation needs a letter of credit or other financial documentation for use in global markets, it simply turns to HSBC, which has local offices around the world. “It's helpful to deal with HSBC because it's the same bank, wherever you go," Blanchet says.

H2O Innovation often turns to its Canada-based banking team for financial advice and solutions and also works with HSBC in Hong Kong. For instance, H2O Innovation recently turned to Jean-Phillippe Theriault, its HSBC relationship manager, for advice about receiving advance payments from customers. “H2O [Innovation] was looking for the highest amount possible up front to purchase materials, but sometimes customers don't want to pay up front," Theriault says. “We were able to offer a bank guarantee, which covers their clients' investment if H2O [Innovation] fails to deliver."

In other instances, HSBC has provided advice on hedging and contract risk, as well as connecting H2O Innovation leaders with banking experts around the world. “As soon as they have a need, they call me," Theriault says. “I deal directly with them to make sure the process is smooth."

Enjoying Global Success

Despite the challenges, conducting business globally has paid off for H2O Innovation. Operating in a relatively small industry, the company has established itself as a global leader, and both its projects and its products are in demand. “In North America, there is no job in which we're not invited to bid," Blanchet says.

Looking ahead, H2O Innovation expects to continue growing globally. Demand for the company's projects in the United States is rising as states in the West and Southwest experience drought and increase spending on water system infrastructure. For its product business, H2O Innovation is increasing investments and efforts in the Middle East and in South America. While Blanchet says the company may consider future acquisitions that would lead it to conduct project work beyond North America, for now, it is content to continue building its product business around the world.

“Making the decision in 2009 to diversify ourselves into the product business was the most important decision we ever made," Blanchet says. “It made us less exposed to the project business, which is lumpy and very difficult to export. Products, on the other hand, are easier to export. Our products sales are also recurring by nature and the margin coming from this business segment allows us to cover90 percent of the company's fixed costs which brings predictability and stability".

By partnering with HSBC, H2O Innovation has access to experienced international bankers around the world that can help it leverage its advantages of skilled executives and innovation. Learn more about how your company can sharpen your global competitive advantage and build success around the world by reading Selling to the World: The Keys to International Business Success, a new report commissioned by HSBC from The Conference Board of Canada.

 

To read the full report of Selling to the World: The Keys to International Business Success, please click here.

 

Note: The opinions expressed by those feature companies do not represent the Bank's views.

Issued by HSBC Bank Canada


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