2019 outlook: Industrials

Technology offers valuable new tools for managing water resources.

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Information technology continues to disrupt the industrials landscape, and one key area where it is making a significant difference is the global water industry. This market is seeing rapid growth driven by a number of favorable regulatory and secular macroeconomic changes, including the need for greater energy efficiency, weather and environmental factors, urbanization, a growing middle class in emerging markets, aging infrastructure, and water scarcity.

Seeking solutions to a mounting problem

Addressing "non-revenue water"—leaks, in other words—is a key growth area within the global water market, and disruptive digital technologies are enabling industrials companies to find solutions for customers to reduce this water loss. Customers span the spectrum of utilities, industrial, and commercial end markets, where "smart infrastructure" is at the crux of helping them avoid failures, minimize downtime, reduce energy and maintenance costs, and meet regulatory mandates.

The need here is pressing. Much of the existing water infrastructure in developed markets was installed in the early to mid-20th century and has an estimated lifespan of 75 to 100 years. A related issue is the lack of funding for infrastructure upgrades; utilities are limited to fixing the most urgent problems. According to the American Society of Civil Engineers, as a result of this fix-it-only-if-it-breaks policy, we're seeing roughly 240,000 water main breaks each year in the United States, and a stunning 20% to 30% of water runs to waste during distribution to end users (see chart below).

That said, global momentum has been building for a more proactive approach to water management. In October 2018, with near-unanimous support, the US Senate approved the America's Water Infrastructure Act of 2018, building on similarly strong support in the House of Representatives the previous month. A key part of the act is the Environmental Protection Agency's WaterSense program, which assists in identifying and promoting water efficiency through myriad products and services. Elsewhere, China's most recent 5-year plan has targeted reducing non-revenue water significantly, as the country focuses on water resources and the environment in dealing with pollution and water management.

Industrials are innovating

Water technologies run the gamut from smart meters, automation, and filtration to smart-water networks. At this higher end of the technology curve, smart-water networks connect equipment such as valves, pumps, meters, and infrastructure in such a way that the equipment communicates with a software platform and provides realtime data analytics, remote monitoring, and diagnostics. A smart-water network helps manage water demand, reduces non-revenue water and energy consumption, and improves water quality.

One company making a meaningful impact within the machinery industry created a product that uses acoustic sensors as well as accelerometer and gyroscope technology to map water pipelines. This helps a utility assess the condition of infrastructure and detect leaks, which tend to be precursors of larger failure points.

I think we're still in the infancy of technology adoption in the water market. Industrials companies that are first movers and employ a business model that generates economic value for customers are likely to be successful.

Next steps to consider

Research the Fidelity® Select Industrials Portfolio (FCYIX).

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Go back to the full 2019 sector outlook.

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