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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 Sornn‐Friese and his former PhD student Thomas Roslyng Olesen. We

studied the historical development of the maritime sector in general, followed by a case study ofhow 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 Sornn‐Friese, 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 15-17th

century. Back then, the new trading worldstretched 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.




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 initialdevelopment 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 highlightedother 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 globalshipbuilding 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 firm’sshut 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




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 impactedR&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 theproducts 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






regards to the repairs of the engines, which resulted in the swift acquisition of engines which

students can practice on.

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