Growth Drivers

This growth driver commentary is an extract from the Halma 2017 Annual Report and Accounts published on 21 June 2017.

Halma’s strategy is to develop market positions primed for growth over 10 years or more. Our operating companies have growth strategies with three to five year horizons.

Our focus is on supplying safety, health and environmental products that protect life and improve the quality of life worldwide. We position our businesses in relatively resilient markets. Our chosen  markets benefit from resistance to cyclical economic downturn, high barriers to entry and long-term growth driven by:

  • increasing health and safety regulation
  • increasing demand for healthcare
  • increasing demand for life-critical resources

Most of our markets are underpinned by regulation. This drives sustained demand throughout economic cycles and often makes customer spending non-discretionary. Our companies’ strong market positions deliver upgrade and replacement sales opportunities as customers seek to maintain regulatory compliance and conform with best practice.

Our competitive environment is influenced by global, regional and national product approvals and technical validations. Compliance with new and updated product regulations is a steadily increasing cost and technical challenge, but our expertise in this area enables us to respond quickly and build competitive advantage.

Halma is exposed to a very diverse range of carefully selected niche markets, each with its own unique drivers. As a result, macro-economic factors affect our businesses’ competitive environment very
differently depending on their market segment and geographic exposure.

Our operating companies develop and execute their own growth strategies and respond to changes in their specific markets. Sector management teams provide strategic support and oversight for wider-reaching and longer-term market dynamics. More detail about our market segments and competitive environment is given in the sector reviews.

Our strategy of focusing on non‑cyclical niche markets with growth underpinned by resilient regulatory drivers and product approvals provides our businesses with genuine stability: resilience in challenging economic conditions and organic growth above prevailing market rates. This underlying intrinsic strength enables us to plan and to invest for the longer-term with confidence.

In 2017 global economic growth is forecast to rise moderately to 3.4%. In the advanced economies growth is expected to edge up to 1.9%. Growth in our largest market, the USA, is forecast at 2.5% but government fiscal stimulus could raise growth higher. Steady growth is anticipated in both Europe and Central Asia during 2017 with a forecast of 2.4%. The strongest economic growth in 2017 is expected in emerging markets and developing economies, where it should rise to 4.5%. The fast-growing Chinese and Indian economies are predicted to grow by 6.5% and 7.2% respectively during 2017.

Growth trends in the global economy for 2017/18, in both developed and developing economies, are broadly favourable for our businesses. We expect developing socio-economic conditions in Asia and South America to drive rising demand for our products used to make workplaces safer, provide healthcare, improve infrastructure safety and manage life-critical resources.

Increasing health and safety regulation

Most of the world’s work-related deaths, injuries and illnesses are preventable and employers must comply with increasingly strict government laws and regulations to protect their workers, the environment and their assets from workplace hazards.

Each year more countries give higher priority to occupational safety and health, and the prevention of accidents and work-related illness. Governments and employers increasingly recognise
the major impact that workplace accidents and disease have on productivity, competitiveness and business reputation, as well as on the health and livelihoods of workers and their families.

Alongside increasing regional, country and industry-specific laws and regulations, globalisation has encouraged many multinational employers to extend workplace health and safety practice across their worldwide operations, particularly in developing economies. These factors drive demand for our Process Safety and Infrastructure Safety products.

Every year more than 2.3 million workers die from occupational accidents or work-related disease; a death every 15 seconds. 317 million non-fatal work accidents occur annually. Workplace fatalities, injuries and illness are a serious human and financial problem for workers and their families and a social and economic burden for businesses, communities and national economies.

There is a global trend for governments and employers to recognise the significant social and economic impact of poor occupational safety and health practice. In addition to the effects of work accidents and illness on individuals, the resulting absence, disability benefits, compensation, interruption of production and medical expenses are a financial burden.

The macro-economic cost of occupational injuries, illness, disability and incapacity is estimated to average 4% of global GDP. In countries with less developed occupational health and safety, a far higher proportion of GDP is spent on work-related injury and illness, reducing capital resources for productive economic investment. The International Labor Organization estimates that work-related illness and accidents cost up to 10% of GDP in Latin America, compared with under 4% in the EU. In the USA, worker illness and injury now costs employers US$225 billion each year.

Safety and health at work standards and practices vary considerably between countries, economic sectors and social groups. However, they are generally improving and becoming more closely aligned. Deaths and injuries take a particularly heavy toll in developing countries, where a large part of the population may work in hazardous conditions. However, greater investment and advances in occupational safety are reducing the number of fatal accidents at work.

Governments around the world are prompted by deaths and injuries caused by accidents to introduce new and tougher regulations to protect people from harm in commercial buildings and public places. The continuous introduction of new, mandatory building codes affecting fire protection, building security, automated doors and elevators drives demand for our Infrastructure Safety products.

Increasing demand for healthcare

The continuous rise in healthcare demand and spending worldwide is driven by a combination of factors:

  • growth and ageing of the global population
  • rising life expectancy
  • increasing chronic disease
  • medical innovations
  • rising incomes
  • increasing patient expectations

Population ageing, together with a rising prevalence of age-related chronic disease, is affecting all regions of the world in both the developed and developing economies. These demographic changes combine to form a strong long-term driver for healthcare services and products in our Medical and Environmental & Analysis sectors. Continuous advances in medical technology and therapies stimulate demand for new equipment.

Driven by a global trend of declining fertility and rising longevity, the number of people aged over 65 is forecast to more than triple between 2010 and 2050. Life expectancy is expected to rise from 72.7 years in 2013 to 73.7 years by 2018. As a result, over 10% of the world’s population will be over 65. In the USA, the world’s largest healthcare market, increasing life expectancy is predicted to double the number of people over 65 by 2050.

Although developed countries have the oldest population profiles (about 20% of people in Japan, Germany and Italy are aged 65 or over), the large majority of older people, and the fastest rates of population ageing, are in the less developed economies. About 9% of China’s population is currently aged over 65, but the proportion is expected to rise to around 12% in 2020. By that time health services for the elderly will account for nearly 23% of China’s total healthcare spending. Almost two thirds of the world’s older people will live in Asia by 2050.

As fertility rates fall globally, the pace of population growth is slowing in almost every region except Africa. In 2015 the global population reached 7.3 billion, almost three times higher than in 1950. Despite the falling rate of growth, world population is still projected to rise to 8.5 billion by 2030. Almost 40% of growth in the global population during 2015 to 2030 is expected in Africa.

Global healthcare spending – about 10% of global GDP – is forecast to grow faster than the global economy over the next few years, rising from US$7 trillion in 2015 to US$8.8 trillion by 2020. While the global healthcare market is still dominated by the developed world, government spending as a proportion of GDP is projected to rise at the fastest rate in the developing economies. Advanced economies such as the USA, Europe and Japan spend about 12% of GDP on healthcare; developing economies average about 6% of GDP. Almost two thirds of the world’s total healthcare expenditure occurs in the developed economies, with the USA alone responsible for 40% of the global spend.

In addition to the powerful demographic healthcare demand drivers of global population ageing and population growth, rising affluence is also a strong driver in the developing world. Healthcare spending in emerging nations is forecast to rise dramatically. The strongest growth forecast of 15% is India, with annual growth in China estimated at over 12% supported by government investment and initiatives to improve the accessibility and quality of healthcare.

The incidence rates of cancer, heart disease, stroke, respiratory disease, diabetes and hypertension have risen sharply in the past decade, particularly in developing regions. These chronic diseases are the leading cause of mortality worldwide due to population ageing, more sedentary lifestyles, changing diets and rising obesity.

Halma’s focus on ophthalmology and advanced blood pressure monitoring products directly relates to the diagnosis and treatment of these chronic and age-related diseases.

Increasing demand for life-critical resources (such as energy and water)
Continuous growth in demand for life-critical resources is the result of social and economic development. According to the United Nations, almost 3 billion people in 48 countries will be facing water shortages within 10 years that could cause conflict and political destabilisation. By 2030 there will be a global freshwater deficit of 40%. Global electricity demand is forecast to double by 2060.

Rising energy consumption and water usage is driven by four key trends:

  • population growth
  • economic growth
  • rising living standards
  • dietary and agricultural changes

During the 20th century water consumption grew twice as fast as the world population. Water scarcity is now highlighted by the World Economic Forum as the most serious risk that our planet faces.

Water consumption is driven by long-term trends: growing populations, rising affluence, industrialisation and urbanisation in emerging markets, and outdated water infrastructure in industrialised countries. These same trends have led to the pollution of water resources, further reducing the capacity of the natural water cycle to meet the world’s growing water demand.

The problem with access to fresh water is not its finite volume but inadequate distribution which is largely dependent on economic resources. Affluent countries manage water resources to meet demand, but developing economies often lack basic infrastructure to deliver clean, safe water.

Over 4 billion people (about two thirds of the global population) currently live with severe water scarcity for at least one month a year. Half a billion people live in regions where water consumption from underground aquifers is continuously depleted because abstraction is double the volume of water replenished by rain every year. By 2025, 1.8 billion people are predicted to face absolute water scarcity.

Climate change and global warming also raise pressure on the world’s freshwater resources. Rising temperatures in agricultural areas increase the rate of water evaporation from soil and crop transpiration, raising irrigation demand. Higher temperatures also raise energy consumption through increasing use of air conditioning.

Current water consumption patterns are unsustainable. By 2050, the United Nations expects global agriculture to produce 60% more food (100% more in developing countries), but the current growth rate of agricultural water consumption cannot be sustained. Industrial demand for water is predicted to rise by 400% between 2000 to 2050, with the highest increases in emerging economies.

Competition for water resources is forecast to increase between industries and economic sectors, and between countries in both developed and developing regions. The rising value of finite water resources drives demand for our water conservation, treatment and testing products.

Rising affluence in developing economies lets people change their diet from starch-based foods to meat and dairy, which significantly raises agricultural water consumption. Producing one kilo of rice uses 3,500 litres of water but it takes 15,000 litres to produce a kilo of beef. Dietary change has been the primary driver of global water consumption over the past 30 years, a trend which is expected to continue well into the middle of the 21st century.

Rising demand for energy and water is strongly linked. Power generation, fossil fuel extraction, transport and processing, and biofuel crop irrigation all consume large volumes of water. Water used in energy production can also degrade freshwater resources by reducing the downstream volume and quality. Energy is vital to provide fresh water, powering the systems that collect, transport, distribute and treat it. After agriculture, energy production is the second largest water consumer worldwide. Energy uses about 15% of the world’s total water withdrawal, but this is expected to rise by 20% by 2035.

In recent years water shortages have shut down thermal power plants in India, affected energy production in US power plants and threatened hydropower electricity generation in many countries, including Sri Lanka, China and Brazil.

The World Energy Council reports that energy demand growth is slowing and that per capita energy demand will peak before 2030. New technology, government policies and reduced expectations of economic growth will significantly affect the energy sector in coming decades. Despite a levelling of the per capita energy demand, global energy consumption will continue to rise due to population growth, rising affluence and urbanisation.

While global GDP is forecast to double over the next 20 years, total energy demand is predicted to rise by only 30% due to technological improvements in energy use and environmental concerns. The large majority of the extra energy will be consumed in fast-growing emerging economies; energy use within developed economies is predicted to remain largely unchanged.

The oil and gas segment of the energy market consists of three sectors: upstream (exploration and production), midstream (storage, processing and distribution), and downstream (oil refining and raw gas processing). Although industry analysts predict that oil prices will rise gradually during the next few years, the impact of the heavy price downturn in 2014 is continuing to limit capital investment by the oil majors in most regions. During 2016 capital investment in upstream projects remained under extreme pressure. The deepest upstream spending cuts have been in the USA, but capital investment is largely unchanged in Saudi Arabia and most of the Middle East. Investment continues in midstream and downstream oil and gas storage and refinery projects where our Process Safety products have most exposure.

The oil price downturn is expected to have a long-term effect on capital investment in the oil and gas sector and the recent capital allocation trend has shifted towards shorter-cycle projects. It is estimated that around US$620 billion of projects through to 2020 have been deferred or cancelled.

We expect several of our businesses will see a continued fall in revenue from upstream oil and gas projects. However, a combination of long-term growth in energy demand, rising capital expenditure in refining, petrochemicals and pipelines in the oil and gas midstream/downstream sectors, and in alternative energy markets like wind farm power generation, will offer growth and diversification opportunities for our businesses affected by the short-term oil price fall.

As global demand for water resources becomes unsustainable, the value of conservation, improving efficiency and effective monitoring is growing. Several of our Environmental & Analysis sector businesses operate in markets driven by the global trends of rising demand for life-critical resources such as energy and water. Rising energy demand, and continued global investment in the key sectors of traditional and unconventional energy sources, also drives demand for our Process Safety products.