Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014
Emerging Sectors of the Sea.
With an underlying theme of Emerging Sectors of the Sea, this segment of the study mission examines the various industries within the broader maritime sector; with a focus on the Danish Offshore Cluster in the Port of Esbjerg. The first half of the program is conducted within a classroom setting with Professor Henrik SornnFriese and his former PhD student Thomas Roslyng Olesen. We studied the historical development of the maritime sector in general, followed by a case study of how dislocation of shipbuilding activities from Denmark to Asia impacted Danish Shipbuilders and its supporting industries. The latter half of the segment provides more industry exposure and experiential learning opportunities as we visited various Danish organizations including Port of Esbjerg, companies offering offshore services and a maritime academy based in Svendborg.
Industry Emergence: Concepts and Perspectives Professor Henrik SornnFriese, who heads the underlying theme, introduced the theme with a lecture against the historical backdrop of how ship owners came to be. While the earliest form of shipping could be traced back to Egyptian coastal trade in 3000 BC, shipping only became a global business in the Age of Discovery around 15-17 th century. Back then, the new trading world stretched from North and South America in the West all the way to China and India in the Far East. Using ships, merchant traders could fetch handsome rewards by trading various cargoes between the continents. However, with subsequent proliferation and sophistication of seaborne trade over the next couple of centuries, the business of owning and operating ships grew to become a distinctly separate line of business from trading. The need for ship owners became apparent. At the same time, other supporting industries such as ship finance, ship brokerage, wrecking (marine salvage) etc. also emerged to support the expanding shipping industry. Amongst which, the most notable development would be the evolution of Edward Lloyds coffee house to the insurance market and classification society known today as the Lloyd's of London and the Lloyd's Register.
With that in mind, we could better appreciate the shipping industry as part of the much broader maritime sector which encompasses shipping as well as supporting industries which can operate onshore or at sea. Specifically, we ought to include suppliers for machinery and supplies, service providers, infrastructures, regulators as well as the surrounding institutional set-up e.g. trade associations, marine academy etc.
Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014
In the past century, many new additions to the broader maritime sector emerged on a similar basis of how ship owners came to be and also based on geographical endowments. For instance, various offshore industries (e.g. Offshore Oil & Gas, Offshore Wind & Deep Sea Mining) have emerged in Esbjerg, Denmark. These industries rode on the exploration and production projects in the North Sea where firms combat rough waters and weather conditions to extract crude oil. This initial development core competency and expertise to operate under harsh conditions provided a base for newer industries which are currently in the high growth phase of the industry life cycle e.g. offshore wind industry and deep sea mining. The emergence of Ship Management firms, on the other hand, is really a case of increasing labor division and skills specialization. Much like how ship owners were uncoupled from trading, this traditional in-house function has developed into professional independent companies which provide the service of managing the daily operations of ships. Furthermore, with a lesser need to monitor the daily vessel operations, the ship owners function then focuses on strategic ship investments or divestments in this highly cyclical industry. Unlike the its predecessor, the modern day ship owner have the flexibility of placing his vessel on shipping pools, leasing his vessel out, contract ship management firms etc. Professor Henrik also highlighted other emerging trends such as Green shipping and growth potential in Arctic Shipping.
Creative destruction in the Danish Maritime Industry: From Shipyards to Maritime Technology Over the past three decades, we have seen a dislocation of shipbuilding activities from Europe to three main Asian nations, namely Japan, Korea, and China. CBS research fellow Thomas Roslyng Olesen presented his paper on how Danish shipbuilders and affiliates were impacted by the shift and hope that this study would offer some insights to these Asian nations should the industry once again decide to shift operations to another part of the world. This transition period took place from 1977 to 1985 where the European market share of global shipbuilding fell from 41% to 18% while Asia increased its market share from 46% to 70%. This shift was in fact part of a larger movement where European manufacturing sector in general declined. Owned by the J Lauritzen Group, Danyard Frederikshavn was one of then one of the major ship yards in Denmark who had to go through this tough period of change. Initially, the Danish yards tried to adopt a blue ocean strategy in attempt to differentiate itself from the highly cost competitive Asian yards. By going after niche projects such as advanced chemical tankers, they managed to win large ticket projects from the growing American shipping industry. While well intended, the lack of experience with sophisticated tankers and inability to appoint experienced sub-contractors resulted in heavy losses. In the case of Danyard, it suffered a deficit of 490 million DKK for failing to deliver contracted tonnages. This incident was a major contributor to the firms shut down in late 1990s. With major yards such as Danyard, Elsinore, Nakskov and B&W winding down their operations, thousands of skilled employees who worked at these yards became jobless. In response, a Foundation for Maritime Development and Cooperation (Fonden Maritim Udvikling og Samarbejde) was created jointly by the county, municipality and local business council to create jobs for this skilled labor force. Eventually, this pool of skilled labor was absorbed into over 26 large corporate Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014
spin offs, out of which, some continue to exist today in one form or another (approximately 10) while some spin offs were less successful. Thomas concluded that the success of these spin offs stemmed from various conditions which includes the availability of investors, availability of entrepreneur, transferaability of skill sets etc. This economic transition which was forced upon the Danish yards forced business leaders to rethink their business strategy, rethink their business models as well as leverage on existing competency to stay relevant to the changing needs of the global economy. The emergence of low cost Asian yards had prompted the need for dislocated Danish yards to move towards more knowledge intensive activities which can offer high value add and hence justify the high cost of labor. This conjecture is perhaps supported by the fact that the closure of yards had not impacted R&D jobs as much as labor intensive jobs.
Offshore Cluster: Port of Esbjerg, SEMCO and Blue Water Shipping The port of Esbjerg is the biggest port in Denmark with 150 years of history. The town of Esbjerg grew from an initial population of 15 families to the current 100,000 people with the development of the port. It started out serving the dairy exports industry to the UK before developing as a fishing port. As the oil and gas industry took off in Denmark, it serves as a hub where the products pass through.
In recent years, the port has started expanding the port facilities towards the east, with an expected investment of 105 million. The new east port will emphasize on developing Esbjerg as major exporting port for wind turbines and offshore facilities. Currently, the port has Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014
a substantial market share of 65% of the total Danish wind turbine export and 80% of offshore facilities. Increasingly with the offshore drilling conducted further off in the North Sea, there are concerns regarding the competitiveness of utilizing Esbjerg as the port for exporting the offshore facilities. Nevertheless, the port management has been consistently improving the port conditions by dredging the channel and maintaining a substantial draft of 10.3m.
Svendborg International Maritime Academy (SIMAC) SIMAC has a history of 150 years in maritime training in the town of Svendborg. Its current location was built in 1952 after they vacated the previous premise. It has a total of 3 different locations, each catering to a different aspect of their training. The aim moving forward is to integrate the three different locations into a single site, to improve the convenience to the students. Being an independent institution with over 600 students, SIMAC offers three main programs - Ship Officer, Marine Engineer and Master Mariner. Although SIMAC offers dual certification for ship officers with the intention of differentiating Danish seafarers, the results were less successful as it was difficult to utilize both skills onboard traditional ships. The 4 year course and industrial attachment prepares the students for a career onboard, with the minority of the cohort becoming ship captains after 10-12 years. Although most seafarers start off their careers with foreign shipping companies, they do eventually return to Denmark for a shore-based career, and contributing back to the country with their global mindset and experiences.
The competitiveness of the Danish shipping industry can be summarized in the following factors: Taxes: Special tax exemptions applicable to Danish seafarers made it a lucrative career option for most students, given the high income tax rates in Denmark. From the perspective of the ship owners, the implementation of the tonnage tax further incentivizes them to fly their ships in Denmark. Technology: High technological advancement and the continuous emphasis on green-shipping differentiates Danish shipping beyond just cost considerations Talent: SIMAC plays a significant role in ensuring a constant provision of highly qualified officers for the shipping industry. It has increasingly become more challenging for SIMAC to continuously attracting new talents into this industry. Currently, female makes up ten percent of the total cohort and efforts have been made to continuously attract females into the industry. SIMAC possesses a simulator at the Western location which offers the students an unparalleled experience in learning navigation first hand, short of actually going on board a ship. At the location was also a lab containing an actual diesel engine. This was an initiative by the students who wanted hands on training. They were able to source the engine after obtaining funding from the municipal Government and this engine has benefitted not only the students, but also companies who were able to run tests on the engine, with the results being similarly viable as those taken on board a real ship. The students were also required to have technical skills which include welding and basic maintenance. On site were facilities which catered to such trainings and it was mentioned that it is preferred for the students to possess such competencies which will make them better supervisors. Employees of the students have highlighted the need for them to have practical knowledge with Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014
regards to the repairs of the engines, which resulted in the swift acquisition of engines which students can practice on.