Nick Kozak for the Toronto Star
Case Studies

Toronto filtration firm faces unchartered waters in outsourcing manufacturing

Vital Stats
Name:
NanoStruck Technologies Inc.
Address:
2660 Meadowvale Blvd., Unit 6B, Mississauga, Ont., L5N 6M6
Field:
Nanotechnology, wastewater remediation, mining-tailings recovery
Employees:
20
Active:
Less than one year in current configuration (company previously existed in different forms)
Core Customers:
Municipalities, food and drink makers, mining companies

NanoStruck Technologies is profiting off the backs — or rather, the shells — of sea creatures.

The Mississauga-based firm has built its business around technology that mimics how shells filter out contaminants in polluted water.

It uses a powder made of absorptive molecules derived from the shells of crustaceans like shrimp, lobster and crab fish. These nanometer-sized polymers act as molecular sponges and can be custom-programmed to absorb specific particles.

This makes them extremely effective in industrial wastewater remediation, an eco-friendly means of removing toxins, heavy metals, hydrocarbons or organic waste.

NanoStruck now sells water-filtration plants — which typically cost between $1 million to $2 million, depending on flow-through rates and the nature of contaminants — and charges a fee on top for maintenance. Alternately, it leases out units and charges customers on a price-per-litre basis.

Its clientele include an ice cream maker with waste rich in dairy that can contaminate the surrounding water and air; municipalities dealing with wastewater leaching from landfill sites; and it’s in talks with a transportation company, which needs to treat its bus-cleaning wastewater.

To keep costs down, NanoStruck is seeking to outsource manufacturing of its filtration plants overseas, where labour is cheap. But the theft of its patented technology is a major concern.

“We want to follow the Apple model, which is to focus on design and engineering, and manufacture our product elsewhere,” CEO Bundeep Singh Rangar explains. “But because of the risk of intellectual property theft we won’t get the best bang for our buck.”

On top of wastewater remediation, NanoStruck believes its molecular sponge technology can offer a potentially economical way to recover base metals and precious metals such as of gold, silver and platinum from mine tailings, the finer particles stored in ponds after chunkier parts of metals have been mined.

The tailings recovery side of the business is still in the development stage, but NanoStruck sees it as an avenue for substantial growth. About $20 billion was left behind in tailings in 2012, according to company estimates. “Even if you capture a small slice of that, you’re still getting good revenue,” Rangar says.

Within the world of wastewater remediation, NanoStruck’s patented nano-technology sets it apart from competitors, whose solutions are based on the use of membranes and reverse osmosis to treat water.

NanoStruck doesn’t want to manufacture its own remediation plants. “We can scale up faster if we focus on winning business by dealing with samples, analyzing them and configuring solutions specific to client requirements, then designing a machine and giving that design to a company to build it for us,” Rangar says.

Asia is the most obvious choice of destinations to which it can outsource its manufacturing, given the cheap labour costs and production capability in the region. Problem is, Rangar says, “the risk of intellectual property pilfering is highest in Asia, particularly China.”

Whereas Apple has “deep pockets” and can vigorously fight IP infringement, Rangar notes that NanoStruck is still getting established. “We want to focus on the commercialization and deployment of our technology, not spend time and cash fighting patent infringement cases.”

NanoStruck needs to find a location where it can have its treatment plants manufactured in a cost-effective way but where its intellectual property will be protected. “(IP) is ultimately where the long-term value is for our company,” says Rangar.

Intellectual property consultant and lawyer Marcel Mongeon suggests NanoStruck partner with a multinational Asian manufacturer that has operations in Canada. “This ensures there is someone locally that NanoStruck could deal with, and potentially sue locally, if problems develop.

Rangar hopes to do just that: find an Asian manufacturer with a Canadian subsidiary it can contract to manufacture its treatment plants. “The (IP) protection comes through the Canadian subsidiary, and we’re able to optimize costs by having manufacturing done via the Asian partner. You get the best of both worlds.”

NanoStruck also builds safeguards into its equipment to thwart copycats. The waste treatment units have dummy parts, for example, making them difficult to reverse engineer. And the company assigns Internet protocol codes to its machines, to monitor performance remotely but also disable the machine if tampering is suspected.

At the moment NanoStruck is manufacturing its treatment units in-house, at a GTA-based factory. But Rangar says the company soon plans to transfer production to a locally-based company.

“That way we’re close to where the treatment plants are getting manufactured and can supervise and oversee things — and be protected by Canadian (patent) laws.”

Ranger says outsourcing further will have to wait for the right partner.

“We’ve got to bite the bullet on the cost right now,” he says. “It’s just too risky.”

EXPERT VIEWS

As Interviewed by: Rosemary Westwood

Fear does not protect you from danger. NanoStruck's founders should definitely be concerned, but they need more than concern to ensure future success. All business decisions involve trade-offs. Is outsourcing to China really that cost-effective if doing so undermines the intellectual property rights your company is built upon? Is protecting IP rights so important that it is worth making less profit? Will building the solution at a higher cost of goods sold undermine the feasibility of selling the solution? NanoStruck might be better off looking to jurisdictions where a balance can be struck between low-cost labour and intellectual property protection. NanoStruck might partner with the Economic Development Corporation of Canada to see how other companies have dealt with this issue. Or they might consider a foreign OEM (original equipment manufacturer) that has significant local assets. This ensures the foreign company has something to lose if they steal NanoStruck's IP. There are no perfect answers, just workable solutions.

by Sean Wise - Ryerson

Given the high level of counterfeits in China, NanoStruck is right to be worried about manufacturing there. I’ve heard first-hand about some particularly blatant cases of patent infringement. The problem is that China’s IP system may not yet be mature enough to effectively enforce IP rights, particularly for foreign companies. NanoStruck could file for Chinese patents, but in enforcing them, it would be litigating in a foreign country in a foreign language, a complex and costly process without guarantee of success. However, it can be effective for SMEs to obtain patent protection in end-user markets instead, where they have a better chance to enforce and deter the use of counterfeits, including the opportunity to stop importation of counterfeits into those countries. For NanoStruck that might be the U.S. and Mexico to start. Finally, perhaps NanoStruck’s products can be made inexpensively in Mexico, South Korea, or other Asian countries. Wages might be higher than China, but so too might be the chance at effective IP rights enforcement.

by Jon Mesiano-Crookston

The company has been around for a while, and the challenge is they need to be able to show the technology can be used cost effectively. They need to prove that it generates enough value to be able to afford to produce it, and generate profits. Part of the challenge is they’re not equipment manufacturers. They have a suite of IP, and they’re promoting it and looking for contracts for people to buy their IP, which can be customized for different solutions. So outsourcing is a possible solution to prove they can offer the technology cost effectively. To speed that process up, they could focus on one project that can be easily scaled and replicated, that you can sell to other markets, and demonstrate that you can deliver the solution at the right price. While their IP concerns in outsourcing are fair, there is always a risk. They could also look at creating their own plant in China. But until they provide cost effective plants or facility to clients that utilizes the technology, they have nothing.

by Neil Wolff - Ryerson

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