Growth Drivers

This growth driver commentary is an extract from the Halma 2016 Annual Report and Accounts published on 21 June 2016.

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 on the supply of safety, health and environmental products positions our businesses in relatively non-cyclical markets with 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

Regulation underpins most of our markets, driving sustained demand and often making customer spending non-discretionary. Our companies’ strong market positions deliver upgrade and replacement sales opportunities as customers seek to maintain compliance and conform with best practice.

Our competitive environment is influenced by global, regional and national product approvals or 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, macroeconomic factors can 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 review pages.

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.

For 2016/17, growth projections for the US economy, our largest geographic market, are in the region of 2.6%. Economic growth forecasts in the region of 1.7% in Europe and 2.2% in the UK are expected to support steady growth in these markets. The volatility of Sterling relative to the US Dollar and Euro means that our companies need to manage input costs and pricing closely.

The emerging economies are forecast to continue to grow at 4 or 5% through 2016/17. Developing socio-economic conditions in Asia and South America are expected to fuel greater demand for our products used to create safer workplaces, provide healthcare, improve infrastructure safety and manage life-critical resources.

Increasing health and safety regulation

A large majority of work accidents are preventable and employers throughout the world must comply with increasingly strict government laws and regulations to protect their workers, the environment and their assets from workplace hazards.

A growing number of countries are now focusing on occupational safety and health, and on preventing accidents and work related illness. There is a global trend for governments, employers and workers to recognise the significant economic and personal impact of work accidents and ill health.

In parallel with increasing national regulation, particularly in developing economies, many multinational employers based in the developed world are extending their health and safety practices across their global operations. Employers increasingly recognise that work-related accidents and diseases can damage productivity, competitiveness and a business’ reputation. These factors drive demand for our Process Safety and Infrastructure Safety products. Globally, an estimated 2.3 million workers die each year from accidents at work and work-related diseases. That is over 6,000 fatalities per day, or one person every 15 seconds. A further 317 million workers suffer non-fatal work accidents every year.

The financial impact of poor occupational safety and health practice is due to absences from work and sickness, disability benefits, compensation, interruption of production and medical expenses. In addition to the human cost, this is a social and economic burden for enterprises, communities and countries. The macro-economic impact of occupational injuries, illness, disability and incapacity is estimated to be 4% of global GDP. Above average countries are estimated to be costing up to 10% of annual GDP.

Safety and health at work standards and practices vary considerably between countries, economic sectors and social groups. However, they are generally rising 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 that 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

Global healthcare demand is driven by five long-term demographic trends:

  • ageing of the global population
  • growth of the global population
  • increase in chronic disease
  • rising developing world incomes
  • new medical technologies and therapies

All regions of the world, in both developed and developing economies, are experiencing population ageing together with rising prevalence of age-related chronic disease. These demographic factors 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 medical procedures also 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. The proportion in Western Europe will hit 20% and in Japan 28%. In the USA, the world’s largest healthcare market, increasing life expectancy is predicted to double the number of over-65s by 2050. While about 9% of China’s current population are aged over 65, the proportion is projected to rise to around 12% in 2020. This will mean that healthcare services for the elderly will account for nearly 23% of China’s total healthcare budget.

Although developed countries have the oldest population profiles, the large majority of older people and the fastest rates of population ageing are in developing countries, where the number of older people is forecast to rise over 250% by 2050.

Fertility rates are falling globally causing the population growth rate to slow in almost every region except Africa. In 2015 the global population reached 7.3 billion, almost a tripling of the population in 1950. Despite the population growth rate falling, world population is projected to rise to 8.5 billion by 2030. Almost 40% of population growth 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 decade at over 6% annually. The global healthcare market is still dominated by the developed world. Economies such as the USA, Europe, and Japan spend about 12% of GDP on healthcare whereas developing economies average about 6% of GDP. Advanced economies account for almost two thirds of the world’s healthcare expenditure with the USA alone responsible for 40% of the global spend.

In addition to ageing, population growth and rising affluence are strong drivers of healthcare demand in the developing world. Healthcare spending in emerging nations is forecast to rise dramatically with annual growth estimates for India and China at over 15% and 12% respectively, boosted by national initiatives to improve 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. The United Nations predicts that the world’s growing population will need at least 40% more water and 50% more energy within the next fifteen years.

  • 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. Increasing global demand for fresh water resources is driven by growing populations, urbanisation, migration, food and energy production, and economic factors like trade globalisation and changing patterns of consumption. 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.

Today, about one third of the global population lives in water-stressed countries. By 2025 that could rise to two thirds. By 2050 the United Nations expects that the world will need to produce 60% more food (100% more in developing countries), but the current growth rate of agricultural consumption of freshwater resources is unsustainable. Water demand for manufacturing industry worldwide is predicted to rise by 400% from 2000 to 2050, with the largest 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.

As people in developing economies become more affluent, they can switch from starch-based diets to meat and dairy diets, which raises agricultural water demand. Dietary change has had the strongest impact on global water consumption over the past 30 years, and this trend is expected to continue well into the middle of the 21st century.

Rising demand for energy and water is strongly linked. Water is used in power generation, in fuel extraction, transport and processing, and to irrigate biofuel feed stock crops. Water use in energy production can also affect fresh water 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. Energy uses about 15% of the world’s total water withdrawal, but this is expected to rise 20% by 2035.

Global economic growth is forecast to drive up energy demand by 34% between 2014 and 2035. Most of the extra energy will be consumed in the fast-growing emerging economies; energy use within developed OECD countries is expected 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).

In response to the recent slump in oil prices, the oil majors have postponed many projects and made massive cuts in upstream capital investment. Despite signs in the second quarter of 2016 that the oil price is beginning to rise, energy industry forecasts suggest that upstream sector capital investment is likely to continue to fall in the short- and medium term.

Conversely, the oil price fall has been favourable to midstream and downstream processors who have benefited from lower feed stock prices. As a result, investment continues in midstream and downstream oil and gas storage and refinery projects where our Process Safety products have most exposure.

Several of our businesses may see revenue from upstream oil and gas projects continue to fall. 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.