A quick break from hotels: environmental investments
/I will continue my hotel market-sizing series tomorrow, but I saw a really interesting article in Bloomberg about an environmentally-conscious jeans maker in Vietnam. You can read it here.
A few things I found interesting:
“Saitex invested $2 million in the water system alone to prove it’s not only possible to make environmentally safe blue jeans, but you can turn a profit doing it.” Later in the article, the company says it cut its water bill by half from $700,000 to $350,000. Based on a 10-year life for the water system, which is pretty long, the IRR is 11.7%. This falls to just 5.3% for a seven-year life and rises to 13.8% with a 12-year life. Not bad, but I thought it would be better. Obviously there are externalities that aren’t being accounted for here: 1) the public benefits from having less “blue toxic sludge” and 2) the company can sell themselves as an environmentally-conscious denim maker.
My first thought is that someone should just go in to all of these factories and offer this technology for a percentage of the savings. Assume that over time the $2m in initial investments can be done more efficiently, say $1.5m, and the life of the investment/contract is 10 years, then the IRR is 19.4%. Now if the company keeps 25% of the savings then the IRR for the firm providing the funding falls back to 11.7%. If the costs can fall a bit more and the efficiency increases by 10% or more, then it would be a great business model. The big risk is if something happens to the company (bankruptcy, closure) within the 10 years. It takes 6 years, in our $1.5m/25% example, to just make back the money.
Overall Bahl says that he saves $1.7m a year vs his similarly-sized competitors. It cost $2m for the water system, and he also put in solar and biomass generators, plus a system for air-drying the denim and new washers. There is no figure on the total amount of costs, but if I had to make a wild guess, I would say $10m for everything. If so, that gets us an 11% IRR, going up to 13.6% if the investment was just $9m, and 16.7% return at $8m. Then it really starts to get interesting.
Textiles and clothing made up 16% of Vietnamese exports ($34bn) in 2017. That’s a lot. And that means there are a lot of factories that could take advantage of this. Scale likely matters, but even smaller ones could probably benefit from some of the efficiency.
Energy and water management businesses could be very big business, but they are hard to manage. The Smartest Guys in the Room really opened my eyes to how very smart people could go wrong in a business if they are unable to manage the details (scroll down for more info on that on Enron).
The World Bank and Vietnam’s Ministry of Industry and Trade jointly launched a $102 million project to support the efforts of industrial enterprises to adopt energy-efficiency technologies and practices in late 2018. This is funding that goes through financial institutions. The details aren’t totally clear, but seem positive. More here. The Green Climate Fund is also involved in projects in Vietnam.
My conclusions are that Saitex seems like a real leader in this sort of change in the textile industry. That energy efficiency can be quite profitable, but the upfront costs are hard to fund. The investments need to be carefully considered, because changes in assumptions mean a big difference in returns. And that these are very long-term investments. A commitment under 6 years really makes no sense.
I’ve reached out to the CEO of Saitex to see if he has any comments. I will let you know if I hear anything.