For
most of the past 20 years, the environmental industry has been a
very significant one, both in Massachusetts and across the country.
Some have placed it alongside the electronics, computer hardware,
software, biotechnology, fiber optics, and composite materials
industries as part of the high-technology sector that has
diversified and strengthened the state's economy. Nationally,
environmental industry employment exceeded that of several major
manufacturing industries, including chemicals, paper, and aerospace.
In
the late 1990s, however, the momentum of the environmental movement
began to wane. A decline in both employment and sales suggests that
many of the most pressing environmental concerns have been
addressed, first by government regulations, then by companies'
in-house pollution-reduction efforts. Industry executives are aware
of certain steps that can be taken to keep Massachusetts moving
forward in the environmental industry. Still, they have concerns
about future growth.
Massachusetts has been considered one
of the nation's leading states in the environmental industry, thanks
to its landmark policies in source reduction, recycling, hazardous
waste cleanup, water pollution prevention, and energy co-generation
and conservation. These policies have encouraged Massachusetts
companies to develop state-of-the- art environmental and energy
products and services.
Past studies have noted that the regional New England
industry is dominated by small firms; more than 80 percent have
fewer than 50 employees and revenues below $10 million. The regional
industry has been heavily focused in the service sector; more than
55 percent of companies provide consulting and engineering services.
In 1996, 73 percent of the business for New England firms was within
the region, probably reflecting the predominance of small companies.
The international market for New England firms accounted for only 3
percent of their customer base, versus 6 percent nationally.1
Developing a More Reliable Definition of the Industry
It is important to understand
the significance of the Massachusetts environmental industry
relative to other technology industries in the Commonwealth, to
understand its position relative to environmental industries in
other states, and to determine how well environmental firms are
adapting to industry maturity.
Because of the breadth of the activities it undertakes, the
industry has generally been analyzed through qualitative methods,
with a different methodology for each study. While this has the
advantage of "customizing" the information gathering, it has created
inconsistencies in the definitions used to categorize and analyze
the industry.
In addition to this qualitative information, therefore, it is
useful to use quantitative techniques, which provide an easily
replicated methodology based on published economic data.2
A list of 6- and 8-digit SIC codes that appear to track industry
trends was developed and then confirmed in interviews with industry
leaders. Using these, the industry has now been defined precisely
enough to follow aggregate employment, sales, and number of
businesses, as well as to enable comparisons among this industry and
others in Massachusetts. With this kind of information, the
environmental industry can be monitored on an annual basis.
Numbers Show Strength in the Commonwealth
For analytical purposes, the
industry is viewed strictly in terms of its core sectors: the
environmental engineering and consulting firms sector, the
waste-collection and disposal sector, and the pollution equipment
sector. It does not include related support activities in law,
finance, accounting, insurance, and education.
In Massachusetts, the industry has generated total sales near
$5 billion annually, from roughly 2,400 businesses employing more
than 31,000 people in 1998.3
Environmental industry employment represented almost 1 percent of
Massachusetts workers, and its sales volume was almost 2.5 percent
of statewide personal income.4
Among the 15 major Massachusetts industries in 1996, the
environmental industry ranked seventh in terms of number of
businesses, twelfth in total employment, and fifteenth in sales.
Massachusetts is among the eleven largest environmental
industry states, which together account for almost 60 percent of
national sales, employment, and number of businesses in the industry
in 1998. Nationally, the Commonwealth is the seventh largest state
in terms of sales (representing 4 percent of total U.S. sales in the
industry), eighth in employment (accounting for almost 4 percent of
national employment), and tenth in number of businesses (3 percent).
Paralleling the industry nationally, growth rates in
Massachusetts slowed during the latter half of the 1990s.
Still, the state performed much better than the nation in
terms of employment growth from 1996 to 1998, ranking third among
the largest environmental industry states. Sales growth lagged
behind national rates, and in net growth in the number of
environmental firms, the Commonwealth ranked tenth.5
This implies that much of the employment increase in the
Massachusetts environmental industry over the last few years has
come from firm expansion.
In New
England, Massachusetts dominates the environmental industry,
accounting for 69 percent of all sales, 58 percent of employment,
and 44 percent of total businesses. The Commonwealth had the highest
increase in employment during the 1996 to 1998 period. Massachusetts
and Vermont are the only New England states that have not seen sales
decline from 1996 levels.
Engineering/Consulting Leads Sectors
The engineering
and consulting sector dominates the environmental industry in
Massachusetts, accounting for more than 66 percent of total industry
sales, nearly 60 percent of businesses, and over half of the
employment. This is the highest paying sector, with an average
annual wage of almost $57,000. It is followed by pollution equipment
at $55,000 and waste collection and disposal at $42,000. These
salaries exceed the average state wage of just under $38,000.
In this
sector, Massachusetts ranks second in sales volume nationally,
seventh in number of employees, and ninth in number of businesses.
This is in contrast to the waste collection and disposal and
pollution equipment sectors, where Massachusetts ranks low among the
top-tier states in all three areas.
Industry Executives Enumerate Concerns About Future Growth
While the
employment and sales data help illustrate the general
characteristics and recent trends of the state's environmental
industry, it is also important to get behind the numbers to
understand what dynamics are currently influencing industry
performance and in what direction the industry appears to be
heading. To facilitate this, individual interviews and focus groups
have been conducted with industry leaders.
Most of
those interviewed are concerned about future growth prospects.
Growth strategies traditionally encompass efforts in market
penetration, product development, new market development, or
diversification. While industry leaders recognize the needs for
these strategies, few have pursued them.
Market penetration. Executives hope that opportunities
for additional remediation work will be identified, perhaps through
partial - as opposed to total - clean-ups of "brownfields" sites.
Some companies have increased the types of characterization and
remediation services offered. Others have reduced services and
focused on more specialized areas.
Product development. Overall, executives perceive that
the engineering component of their work is increasingly viewed as a
standard commodity, with margins declining in recent years. Many
expect this to continue. A focus on pollution prevention has been
suggested to offset this trend. Companies have also been encouraged
to develop and sell products and services that integrate
environmental management with overall business strategies. A large
number of companies interviewed indicate that changes in basic
services have not yet been made.
New
markets. A few companies have expanded to new geographic markets
in the United States, but there is also opportunity for growth in
international markets. Among the companies that participated in the
survey, only two of the largest have a long tradition of work in the
international arena. Four have conducted one or more projects
internationally as an outgrowth of work for domestic clients, but
none has gone on to pursue international opportunities on its own.
Three small responding companies have identified foreign
opportunities with the assistance of federal technology programs or
federal and state trade missions and have begun to do work
internationally.
Additional Industry Concerns
Mergers and
acquisitions.
One of
the most significant changes in this industry is in the amount of
consolidation, largely through horizontal mergers. There has been
substantial activity among environmental remediation firms and among
environmental engineering and consulting firms. In the latter
sector, firms engaged in a total of 125 mergers and acquisitions
during 1997. 6
It is expected that long-term survivors will be either small
companies with unique niches or large companies with multi-product,
multi-regional services. Companies in the $50 million – $100 million
range will virtually disappear.
Retaining and recruiting personnel. As the industry
matures and is perceived as less attractive, engineering work is
increasingly viewed as a standard commodity. Contracts are often
awarded solely on the basis of the lowest bid. Perhaps as an
outgrowth of this, many firms have had difficulty attracting and
retaining bright engineers and key staff. There is hope, however,
that talented engineers will become available to the industry as the
"Big Dig" reaches completion.
Opportunities for Enhanced Government Involvement
Executives
provided a number of suggestions regarding improved governmental
support for the industry. There is a need for governments to expand
their environmental enforcement efforts and to have better-trained,
less-adversarial staff implementing programs. Respondents urge that
permitting be streamlined through reductions in red tape, a higher
level of staff commitment, and increased speed in decision-making.
Many
executives expressed hope that the U.S. government would continue to
clean up its own facilities and would pay for cleanups more
promptly. They also feel that the government needs to identify more
ways of privatizing its activities by encouraging self-audits and
certifications by industry, and by avoiding activities that would
place government in competition with the private sector. In
expanding its ability to offer technical assistance and information
to firms facing cleanup tasks, for example, the government directly
competes with private-sector environmental industry firms that offer
these services. Government laboratories are perceived to undercut
private-sector lab prices, threatening the ability of private firms
to compete.
Rather
than including private consultants in program design or
implementation, federal and state agencies seem to be initiating
programs internally to support pollution-prevention efforts (e.g.,
in the auto body and printing industries and by the Massachusetts
Office of Technical Assistance), or to help companies develop
environmental management system protocols.
Another
obstacle is the wide variety, among New England states, of
requirements for issuing permits. This makes efficient regional
service delivery by the private sector quite difficult. Because most
of the companies interviewed do a significant amount of business in
the New England region, they suggest that regulations among the
states be better standardized.
Outlook: No Immediate Changes in Store
Though the
environmental industry has entered a period of maturity, it
continues to be a significant one in Massachusetts. As the overall
economy grew stronger at the end of the 1990s, sales and margins in
this industry hit a plateau. A significant decline in citizen
interest in pollution cleanup, together with a perceived decline in
government enforcement efforts, has taken the steam out of external
demand drivers.
Because
it is comprised mostly of small companies, this service industry has
had difficulty engaging in some of the pursuits that would normally
be undertaken by competitors in mature markets. These include
seeking international opportunities and making significant changes
to core activities in order to meet changing customer needs.
Companies have not yet been forced to change their products
or to expand their domestic-only focus. Instead, they have adjusted
to the mature market by accepting reduced margins, searching for
niche opportunities, and merging with other companies in order to
reduce costs. Private clients continue to engage them for compliance
work, and government clients appear to be initiating more
construction projects, after long periods of site characterization,
design, and planning.
As long
as these conditions remain, it does not appear that there will be
significant changes in this industry. Firms are likely to focus on
cost savings so that they can continue to pursue their areas of
greatest strength.
The
US Environmental Industry Has Followed a Similar Path
According to the US Department of
Commerce's Office of Technology Policy's definition, the
environmental industry includes all revenue-generating activities
associated with: (1) compliance with environmental regulations; (2)
environmental assessment, analysis, and protection; (3) pollution
control, waste management, and remediation of contaminated property;
(4) the provision and delivery of the environmental resources of
water, recovered materials, and clean energy; and (5) the
technologies and activities that contribute to increased energy and
resource efficiency, higher productivity, and sustainable economic
growth (enabling pollution prevention).
Based
on this definition, the domestic environmental industry is estimated
to have had $188.7 billion in sales in 1998, up 1.6 percent from the
previous year, with 1,354,100 employees in 115,850 companies. The
worldwide market for environmental goods and services is estimated
to have been $484 billion in 1998, up 2.3 percent from the previous
year. Environmental goods and services exported by US companies
totaled $18.7 billion in 1998, or about 6 percent of the non-U.S.
market. This was far less international activity than occurred in
Germany and Japan, which averaged over 20 percent of their business
from export activities.
The
last time industry sales grew rapidly (10 to 15 percent a year) was
in the latter half of the 1980s. Reauthorized legislation dealing
with clean air, clean water, and hazardous waste resulted in
expanded private and public cleanup programs, and US firms sought
significant outside help in their efforts to comply with federal and
state air, water, and hazardous waste laws.
During
the 1990s, industry growth in terms of sales slowed to less than 5
percent per year. Customers in the industrial area became
experienced in compliance. Government-sponsored cleanup programs
often stalled after the characterization phase. Competition
increasingly resulted in standardized, lower-margin environmental
services. The pace of new regulations slowed, and government
enforcement efforts seemed to ease off, as the government focused
instead on cooperative programs between regulators and the
industries they regulated. The traditional drivers of the industry,
which had experienced rapid, double-digit growth in the 1980s, began
to disappear as the industry matured.
Along
with the decline in sales growth, average profit margins were 50
percent to 70 percent less in the mid-1990s than they were in 1990.
The investment of venture capital into the environmental industry
also declined steeply during the 1990s, falling from over $200
million in 1990 to $30 million in 1996.
As is
often true of maturing industries, environmental services firms have
undergone a period of significant mergers and acquisitions in the
past decade, representing attempts to enter new geographic markets,
reduce administrative overhead burdens, and add new services.
Companies in the environmental industry have been advised by
industry analysts to consider international markets for growth
opportunities, to move their focus from "end of the pipe" cleanup
activities to pollution prevention, and to sell products and
services that integrate environmental management with overall
business strategies and contribute to core businesses. These changes
have not yet occurred in any significant way.
1 PriceWaterhouse, LLP, "A Profile of New England's
Environmental Industry," April 1996.
2 It was decided to use iMarket Inc.'s MarketPlace data
for the quantitative portion of this study. MarketPlace is the only
data source that publishes quarterly Standard Industrial
Classification (SIC) data to the 6-digit and 8-digit levels. This
enables us to capture firms located in a wide range of industrial
classifications.
3 Numbers are based on data from the 2nd quarter of the
year. Because of the way MarketPlace computes sales data, these are
essentially annualized data. We chose the 2nd quarter in order to be
able to use the most recent data and to have data comparable to that
used for other industries for the Massachusetts Benchmark series.
There is no evidence of a high degree of seasonality in industry
employment, and therefore the 2nd quarter is an adequate
representation of annual employment.
4 Massachusetts Benchmarks, Vol. 1, Issue 4, Fall 1998,
p. 12.
5 The higher growth of employment compared to sales is
due to the increased use of cheaper workers coming out of two-year
vocational programs to conduct much of the standard work product.
6 PriceWaterhouseCoopers, "Environmental Business in an
Age of Consolidation," January 1999.
BETTY J. DIENER is a professor in the Department of
Management and Marketing at UMass Boston.
DAVID TERKLA is a professor and chair of the Economics
Department at UMass Boston.
ERICK COOKE recently received his master's degree in
environmental science from the Department of Environmental, Coastal,
and Ocean Sciences at UMass Boston.
Copyright by University of Massachusetts, the University of
Massachusetts
Donahue Institute, and Massachusetts Benchmarks. Reposted with
permission 11/3/00.
