Capital Well's Next-Generation Solution
New Hampshire's Capital Well is facing a classic predicament; Its core product is rapidly becoming commoditized. It needs to innovate--fast. Here's how.
Joao Canziani
Change or Die Terry Swain needed to find new ways to use his equipment, his people, his know how.
The Sharp End a 9-inch roller cone bit. Good until you hit bedrock.
Joao Canziani
Past, Present. Future Capital Well's co-founder, Mike Dragon (in jacket), with his sons (from left), Adam, Greg, and Joe
Joao Canziani
The Believer Dan Grace is Capital Well's chief evangelist for geothermal. "I am living and breathing this opportunity," he says.
New Hampshire's Capital Well is facing a classic predicament: Its core product is rapidly becoming commoditized. The solution is, in every respect, next-generation
Terry Swain, the president of Capital Well, has a problem. For more than 25 years, his little company of (now) 23 employees has been drilling artesian wells for New Hampshire homeowners and businesses: 250 to 500 feet into the state's famous granite—the ledge, drillers call it—which delivers crystal water, usually many gallons a minute. His customers like his company and will recommend it warmly. Capital Well has a growing and profitable water-treatment business. Swain's partners are a close-knit family: Mike Dragon, his vice president, is the brother of his wife, Cathy; and Mike, in turn, married Terry's sister, Libby. Both couples work in the business by day and still manage to enjoy one another's company in the off-hours. Mike and Libby's three sons, Greg, Joe, and Adam, are running the rigs and installations, and their best friend from high school, Dan Grace, works in sales. With nephews in the field, Swain looks forward to a smooth eventual succession. What's the problem?
To produce water and attach the wellhead to customer homes, Capital Well needs three drill rigs, three support trucks, four service vans, and everything from a couple of backhoes for laying pipes to a grouter to insulate them with silica. The equipment turns over in four to six years, and a single drill rig costs as much as $700,000, so at any given time Swain has $4 million to $5 million tied up. "We are a kind of manufacturing company; our factories take hours to set up and move around every day," Swain says. "It's very difficult if you don't have smart people on board, but we use nothing in the way of hardware that others can't buy." This is a recipe for price war, which has been pushing bids for new wells almost to their cost of production. It's hard for Swain to see how any company that simply drills wells could survive to be passed to the next generation.
"Our capital equipment costs run about $2.5 million a year," Swain says, "and these are pretty much fixed, no matter what the demand for wells. And so recessions in new construction can hurt us badly. Before 2008, we were drilling 400 to 500 wells a year; today, perhaps 225. But the prospects for the well business aren't great in any case." Demand is fluctuating or spiraling down, and there's tough competition over every job. How do you cover capital costs, which make sense only when the equipment is running sunrise to sunset virtually every day?
Customers don't want drills; they want holes, Ted Levitt, the legendary Harvard Business School marketing guru, famously wrote, urging manufacturing businesses to think more imaginatively about their products so as to avoid just this kind of commoditization. But what happens when there are no margins left in the holes, either? A Capital Well salesman will show up at your house at sunrise to bid on a new artesian well when your old well finally runs dry. He'll track new construction and the depth of other wells in the area. He'll take your call day and night. The game, which all well companies now play, is to get the job done faster and cheaper and more painlessly than the next guy. It can grind a person down. "If I didn't have to own a drill rig, I wouldn't," Swain says. "But if I don't have a hole in the ground, I don't have a business."
Swain, Dragon, and especially the young men who hope to succeed them have a solution, a new business venture, which on the surface may seem just another step in their company's cautious diversification. Actually, however, Capital Well is getting into something that portends a revolution in the way America will innovate itself back to robust growth with green "manufacturing" jobs—jobs that cannot be exported. I am speaking of geothermal heating and cooling, which independent businesses like Capital Well are critical to advancing.
This is the first of the green technologies that promises to go truly mainstream and is arguably the most important. About half of household energy costs goes to heating and cooling—considerably more in very cold climates like New Hampshire. Geothermal will get to a mass market not only because its value to consumers is so obvious but also because so many small companies like Capital Well, distributed across the country, are equipped to deliver it.
When most people think of advanced green jobs, they think of multibillion-dollar investments in plants making lithium-ion batteries for electric cars or photovoltaic panels and wind turbines for smartening grids. They fear, not without reason, that jobs in such plants will start in or migrate to the Far East. They certainly don't think of little well-drilling companies pushing a 6-inch-diameter pipe a few hundred feet into the ground. When most think of geothermal heating, moreover, they imagine deep, penetrating probes tapping into superheated subterranean faults in the earth's molten crust, capturing and channeling a kind of geyser. They don't think of a simple refrigerator.
But little well-drilling companies and something like your refrigerator's technology are actually the keys to geothermal. I won't go too deeply into the technical details, but the concept is so elegant and proven that you have to wonder why geothermal was not more highly developed years ago, even in the (fast disappearing) era of cheap oil.
Consider that every time you close your refrigerator door, you hear an electric motor kick on and the appliance somehow absorbs the heat from the food you just took out of the shopping bag and exchanges it with the ambient air in the kitchen. If the food has an average temperature of 50 degrees Fahrenheit, the refrigerator cools it to, say, 38 degrees. How does it do that?
Simply put, the heat is captured by the appliance's refrigerant (anhydrous ammonia, usually), which has been compressed into liquid flowing in sealed coils. The refrigerant vaporizes through an outlet valve in a closed loop of little pipes—in effect, boiling off with the heat from the food, the way alcohol "boils" off your skin with the heat from your hand. The heated, vaporized refrigerant is then pumped back into the compressor, where it is turned back into liquid, which causes it to release its captured heat. (It is the compressor you hear kicking on as soon as you close the door.) Finally, the refrigerant is forced into heat-exchanging coils in the back. That's why the back coils of a fridge are warm to the touch and the air blown out the bottom is very warm.
