Erik Fyrwald: The king of water

erik_frywald.top.jpg Interview by Geoff Colvin, senior editor at large


FORTUNE -- You probably know that General Electric and other large companies have plunged into the water-treatment business, believing it's likely to boom globally for decades. Yet most people don't know that the industry's biggest player -- bigger even than GE in this field -- is Nalco of Naperville, Ill. (2009 revenue: $3.7 billion). It's easy to see why major players want in. The world grows dramatically thirstier as it industrializes -- water demand grows about twice as fast as population. Yet the planet's total water supply cannot be increased; it can only be managed.

The trend plays to Nalco's strength, but for years the company was distracted by shifting ownership and organization. During a turbulent period a decade ago it was part of France's Suez Lyonnaise des Eaux and then a private equity portfolio company. Nalco (NLC) regained its independence in 2004, and four years later hired Erik Fyrwald, a career DuPont (DD, Fortune 500) executive, as CEO. Warren Buffett's Berkshire Hathaway (BRK.A) began buying the stock months later -- a typically shrewd bet -- and is now Nalco's largest stockholder. Fyrwald, 50, talked recently with Fortune's Geoff Colvin about, among other things, competing against giant new rivals and what he learned as an outsider CEO. Edited excerpts:

Let's start with the news. British Petroleum is using a Nalco dispersant called Corexit to break up the gulf oil spill. The EPA recently ordered BP (BP) to stop using dispersants at the surface "if operationally possible" and to study use of other, less toxic chemicals. Is this product safe the way it's being used?

EPA has acknowledged that our product is safe and effective and that it's been unable to identify a safer, more effective available product to date. Should such a product come up, we would fully support switching, as our only desire is to facilitate cleanup in the gulf. It has been challenging to see quite a bit of inaccurate information in discussions about this product. It's made of six common ingredients, all of which have been studied for years and determined safe and effective by the EPA. They biodegrade and do not bio-accumulate. We've made available to regulators all information about the product, its ingredients, and how it interacts with the environment. The EPA continues to approve the use of Corexit in the gulf. It has played a significant role in mitigating the ecological effects of the spill. Of course we hope this disastrous spill can be completely stopped and the cleanup can finish up.

Dispersants are a very small part of Nalco's business. Most of your revenue comes from water-related businesses, helping companies use water more efficiently. Environmentally that's wonderful, but economically, why should companies care about it today any more than they ever did?

A couple of reasons. One is the need for more productivity to be competitive. I think there's also a shift in the desire to be more environmentally sustainable. In addition, the greatest growth in the world now -- China, India, the Middle East -- is in parts of the world that are very water-starved. Their industries require a lot of water, so if you don't use that water very efficiently, there won't be enough water for people to drink.

Industrial use of water is far greater than what we use in our homes, but exactly what do companies do with all that water?

Every manufacturing facility or large building brings in water and typically uses it for its cooling and heating system. In industrial applications there's often a large need for cooling and heating the plant site. Then there's process water, which could be used in making products. All that water gets collected and goes through a wastewater-treatment system before it gets recycled or goes as effluent into a river or other area.

A big reason companies use water inefficiently has got to be that it isn't priced realistically. In some places it's practically free. That can't be a long-term sustainable situation.

Yes, and it happens all over the world. Western Europe, the U.S., and Canada are actually at the higher end of how water is priced. In China, India, and the Middle East, it's priced very low, even though people can't get enough. So you create a lot of inefficiency. People don't take care of the water systems, but then if industry can't get enough water, they can't operate their plants. That even happens in the U.S. We've worked with companies that wanted to use less water just because they wanted to make sure they had access to enough of it to operate their plants.

For example?

Dow Chemical (DOW, Fortune 500) -- their Freeport, Texas, site is their largest in the world. During drought periods they had challenges getting enough water from the river to run their processes. A team of our experts worked with Dow experts, did an audit of the entire site, installed our latest and greatest automation technology to monitor the whole site's water system 24/7. They were able to reduce water consumption at that one site by a billion gallons a year. The whole system runs more efficiently -- less energy, less maintenance -- and the plant can operate with a lot less water, so even during droughts it's not an issue.

Sounds as if we need to expect higher prices for water. Is that what's going to happen long term?

Yes, I think that's going to happen, and it's going to happen around the world. It's the only way you can get the right dynamic of conservation across industry and the consumer -- and by the way, agriculture, which accounts for 70% of the freshwater consumed around the world.

When you look at the water opportunity globally, it's got to be a combination of where the greatest waste is, where the greatest need is, and where the pricing is appropriate. Put those factors together, and from a business perspective, where's the greatest opportunity?

It's in the high-growth countries. We call it BRIC-plus -- the BRIC countries [Brazil, Russia, India, and China] plus the Middle East, South Africa, and the Caspian. It's for general industry and large buildings certainly, but also for the energy industry. The energy industry uses a lot of water.

Pumping oil out of the ground?

That's a big part of it. In oil production, often a lot of water comes out with the oil. We have to pull that water out of the oil, clean it up of course, and then allow it to be reused. Also, when you drill oil, initially the pressure of the oil is high enough that it comes out and your production is very strong. After a few years that pressure drops. So what oil companies typically do is drill other wells and inject water to increase the pressure and get the oil flowing again. That water will find channels through the porous rock and flood the well, which is obviously undesirable. We've developed a product that you inject along with the water. It will go to where that water's channeling. It pops open like popcorn and plugs that water from flowing through, allowing the water to exert pressure and drive increased production. So it can get up to 10% more oil out of that reservoir, with a lot less water being used. In gas production, water can get into the gas wells, and then you have to get that water out. We have technology to get foamers to the right spot, lift that water out, and allow the gas to be produced.

From the consumer's perspective there are two big classes of issues -- places that don't have enough freshwater, and places that have enough freshwater but it isn't safe. What's the outlook for those places?

There are some geographies like India where the challenge is both. There's not enough water much of the year. There's a monsoon season, but the rest of the year there's a water deficit. By the way, the average woman in India spends a lot of her life walking just to get water, carrying it -- a huge issue. But also the water that is available is often not clean enough.

We're working with companies so that not only do they use less water, but any effluent from their facility is cleaner. We worked with the Marriott in Mumbai to recycle their cooling-system water instead of using fresh water. They saved almost 300 million glasses of water a year from that one hotel, which can then be used as freshwater for drinking in Mumbai, where the quality and the quantity of water aren't what you'd want.

This whole business of water globally has attracted the attention of some very large companies -- General Electric (GE, Fortune 500), Siemens, BASF. How does a relatively small company like Nalco compete with these giants?

Well, we're $4 billion in sales today, so we do have some resources. But also we wake up every day, 11,800 people at Nalco, and think about one thing: How can we help our customers use less water, be more energy-efficient with that water, get more oil and gas out of the ground in an environmentally sustainable way, efficiently using the water? That's all we think about from a customer standpoint and a technology standpoint. That's a very powerful motivator for our employees.

You have other technology that reduces emissions from power plants. That gives you a great interest in which fuels are used to produce power globally. What's the outlook?

Like it or not, coal is very abundant, and electricity production from coal-fired units is increasing around the world and will continue to increase in places like China and India. It's heavily used in Eastern Europe and South Africa. So the challenge is, if it's going to be used, how to be more environmentally friendly. That's an area that our technology fits well.

China is opening a new coal-fired plant a week. Is that country actually more interested in pollution reduction than it used to be?

Absolutely. I've been going to China for over 20 years now. I've been in businesses where we built facilities in China, and the challenge was that as a global company, we were building a facility that was meeting our global standards for air pollution and water quality, while our Chinese competitors were not. Today it's very different. The Chinese government has put a high priority on it, and I would say the Chinese population has put a higher priority on environmental improvement. That has translated to business in terms of regulations and enforcement of those regulations. The CEOs of the state-owned enterprises, a big part of the Chinese economy, are being judged on what they call green GDP -- a combination of how they grow their company and improved environmental performance. It's been a tremendous change just in the past two to three years.

I would imagine you think putting a price on carbon, one way or another, is a good idea. What are the chances of its happening in the U.S.?

I think it's inevitable. The question is when, and I hope it happens in a way that's as consistent around the world as possible so that the playing field can be as level as possible. I would hate for us to have a very high bar set in the U.S. and have that cause manufacturing and jobs and technology to go offshore.

You came into Nalco as CEO from the outside. What was at the top of your to-do list?

I spent the first weeks and months listening a lot -- to the leadership of Nalco, talking to people across the organization. Traveled a lot. Got out there with customers all over the world trying to understand what we do well, what we didn't do well, where they saw the opportunities. Spent time with my leadership team, getting their view on what we needed to do and also assessing the leadership and who we really needed, and what other capabilities we needed to bring in.

A lot of people in your position, coming in as CEO, have told me that focusing on the team is critical ...

Step one.

... and in many cases focusing on the culture. From the outside you'll see that it needs to be steered a little bit. Was that the case?

Yeah. The positive is, we had a great culture to build on, a culture of service, customer comes first. But we had not been nearly aggressive enough going after the growth geographies and bringing more of the water system solution to the customer. Talking to the leadership, it was very clear that that was a huge opportunity.

You only get one chance at those first few months. When you look back, what did you learn?

I learned that as you get into the job and start to think you know the answers, don't get locked in. You haven't been in the company that long. You think because you've been in other places that you can figure it out quickly, start to form a theory of what the right answer is. Keep testing that theory, because it does two things. One, it gets the management team aligned. And two, you can get deeper into the organization, you can get customers connected to it, and then you get a much better answer. So don't make conclusions too quickly. At first I thought I knew the answers, but then the answers got much better as we dug deeper. That was very important.

What motivates your customers today? Your fundamental offer is that you'll save them money, and I'm sure that's appealing, but are some of them thinking longer term as well -- thinking about a possible price on carbon or possible new demands from their own customers?

Yes. Five years ago our customer was the plant utility engineer, the purchasing person at the plant, and maybe, if we saved them enough money, the plant manager. Today the CEO and senior business leadership have goals around environmental sustainability that they didn't have before. If they can save money and have a real environmental impact, that's a big deal. And everybody's paying more attention to quality. If we can hit all those buttons, it's appealing to the business leadership in addition to the plant manager and the people running the water system. So we've expanded who the customer is within the customer. And it makes a big difference.

Nalco's largest shareholder is Warren Buffett. Do you hear from him?

I hear from his people. They certainly have visited us and researched us well, and we're glad to have them.

They're probably happy -- the stock has done well since they bought.

It has, and hopefully we'll continue to make them very happy. To top of page

The C-Suite Series: This is the latest interview with top executives by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/csuite -- plus find other Colvin interviews, including those with Charles Schwab, the team of Jeff Immelt (General Electric) and A.G. Lafley (Procter & Gamble), Chevron chief executive David O'Reilly, New York City school chancellor Joel Klein, Pimco's Mohamed El-Erian, Vanguard's William McNabb, and many more.
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