THE BLUE MARITIME CLUSTER CONFERENCE 2016 Net Operating Margin (Rolls Royce, Kongsberg Evotech, Scana, AxTech and Brunvoll) Net Operating Margin Equipment Operating margin GCE Blue

THE BLUE MARITIME CLUSTER CONFERENCE 2016

Challenging times for the cluster: Impressive ability to adapt – but will the cluster emerge complete?

Ålesund, 30 September 2016

Erik W. Jakobsen, Menon Economics

The cluster has experienced a falling activity level in 2015

CLUSTER PERFORMANCE - OVERVIEW

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2

Turnover: NOK 62 bn -12 %

The activity level falls in 2015

Value added: NOK 19 bn -15 %

The cluster profitability is falling

Net operating margin: 0 % - 8 pp

The cluster has experienced low growth the latest years


CLUSTER PERFORMANCE - TURNOVER

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 3






Activity falls across all segments

0

5

10

15

20

25

Shipping Services

-6%-8%

-25%

-5%

YardsEquipmentTu

rno

ver

bn

NO

K

2015

2014


CLUSTER PERFORMANCE - PRODUCTIVITY

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 4






Productivity growth has been weak since 2009

-

200

400

600

800

1 000

1 200

1 400

10

00

EBITDA

Wage Cost

TOTAL

Profitability falling and below Norwegian Benchmark

CLUSTER PERFORMANCE - PROFITABILITY

Operating margin GCE Blue Maritime and Norwegian benchmark 2013-2015 - by

segment. Source: Menon (2016) Net operating margin (EBIT) for the four sectors in 2014 and 2015. Menon (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 7

-5%

0%

5%

10%

15%

20%

GCE BlueMaritime

2014

GCE BlueMaritime

2015

Norwegianbenchmark

2014

Norwegianbenchmark

2015

Depreciation and Amortization Ratio

Net Operating Margin

Gross Operating Margin

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Shipping Services Equipment Yards

2014 2015

Norwegian Benchmark outperformed the Møre cluster since 2011

CLUSTER PERFORMANCE – MØRE VS NORWEGIAN BENCHMARK

Development in employment 2004-2015 GCE Blue Maritime and Norwegian

benchmark (Index). Source: Menon (2016)

Development in Value Added 2004-2015 GCE Blue Maritime and Norwegian

benchmark (Index). Source: Menon (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 8

90

100

110

120

130

140

150

160

170

180

190

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Employment Norwegian benchmark

Employment GCE Blue Maritime

90

140

190

240

290

340

390

440

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Value Added Norwegian benchmark

Value Added GCE Blue Maritime

-

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

B N

OK

Value Added Shipping

Shipping companies are struggling in the current market situation

SHIPPING – OFFSHORE SERVICE OPERATIONS

Value Added 2015. Source: Menon (2016)

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Shipping

53 %

Key financial for the cluster in 2014 and 2015 (Billion NOK). Source: Menon (2016)

2014 2015 Development

Turnover 17.8 16.4 -8 %

Employment 5206 4561 -12 %

Net Operating Margin 26 % 3 % -23 pp

Value Added 11.8 10.3 -13 %

Profit Margin (before tax) 27 % -7 % -34 pp

Development in Value Added 2004-2015. Source: Menon (2016)

2004-2014

CAGR 15 %

2014-2015

-13 %

Market value falling sharply – reflecting uncertainty and a negative future outlook

SHIPPING – COMPETITIVE SITUATION

Market Value – Listed* offshore shipping companies 2011-2016 (M USD). Source:

Menon (2016)

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0

2000

4000

6000

8000

10000

12000

14000

0

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1500

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2500

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aug.

11

de

s. 1

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apr.

12

aug.

12

de

s. 1

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apr.

13

aug.

13

de

s. 1

3

apr.

14

aug.

14

de

s. 1

4

apr.

15

aug.

15

de

s. 1

5

apr.

16

aug.

16

Møre Norway World (right axis)

* Three Møre companies listed: Havila, Farstad and REM

Annual growth in turnover for listed GCE Blue Maritime, Norwegian Benchmark

and Global shipping companies. Source: Menon (2016)

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2009-2014 2014-2015 2015-E 2016

GCE Blue Maritime Norwegian Benchmark Global Benchmark

Market value falling sharply – reflecting uncertainty and a negative future outlook

SHIPPING – COMPETITIVE SITUATION

Norwegian shipping companies size of fleet in August 2016. GCE shipping

companies colored blue Source: Menon (2016)Market Value – Listed* offshore shipping companies 2011-2016 (M USD). Source:

Menon (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 1

Survival will depend on financing: How will the restructuring process end?

0

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aug.

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de

s. 1

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aug.

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aug.

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s. 1

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apr.

14

aug.

14

de

s. 1

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apr.

15

aug.

15

de

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5

apr.

16

aug.

16

Møre Norway World (right axis)

* Three Møre companies listed: Havila, Farstad and REM

-

1

2

3

4

5

6

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

B N

OK

Value Added Equipment

Equipment manufactures delivering negative profits in 2015

EQUIPMENT MANUFACTURES



2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 3

2004-2009

CAGR 20 %

Equipment

19 %

2010-2013

CAGR -1 %



Turnover 16.8 15.7 -6 %

Employment 5130 4961 -3 %

Net Operating Margin -1 % -7 % -6 pp

Value Added 4.4 3.7 -16 %

2013-2014

CAGR -13 %

Dramatic decline, far worse than Norwegian Benchmark

EQUIPMENT MANUFACTURES

Development in turnover and Net Operating Margin 2004-2015. Source: Menon

(2016)

Operating margin GCE Blue Maritime and Norwegian benchmark 2013-2015.

Source: Menon (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 4

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-20

-15

-10

-5

-

5

10

15

20

25

Mar

gin

B N

OK

Turnover Net Operating Margin

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

EquipmentGCE BlueMaritime

2014


2015

EquipmentNorwegianbenchmark

2014


2015




The smaller companies are performing better than the larger ones

3C: EQUIPMENT – PERFORMANCE

Development in turnover and net operating Margin 2004-2015. Split between large

and small companies. Source: Menon (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 5

-15%

-10%

-5%

0%

5%

10%

15%

20%

-14

-10

-6

-2

2

6

10

14

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mar

gin

B N

OK

Turnover (Rolls Royce, Kongsberg Evotech, Scana, AxTech and Brunvoll)

Turnover Equipment

Net Operating Margin (Rolls Royce, Kongsberg Evotech, Scana, AxTech and Brunvoll)

Net Operating Margin Equipment



-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


2014


2015


2014


2015




-

1

1

2

2

3

3

4

4

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

B N

OK

Value Added Services

The service segment is key for the innovative power in the cluster

MARITIME SERVICES (INCLUDING SHIP DESIGN)



2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 6

2004-2014

CAGR 16 %

Services

16 %



Turnover 14.3 13.7 -5 %




2004-2014

CAGR -12 %

Profitability below Norwegian Benchmark

SERVICE SEGMENT - BENCHMARK

Development in turnover and Net Operating Margin 2004-2015. Source: Menon

(2016)



2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 7

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-

2

4

6

8

10

12

14

16

Mar

gin

B N

OK

Turnover Net Operating Margin

0%

2%

4%

6%

8%

10%

12%

Services GCEBlue Maritime

2014

Services GCEBlue Maritime

2015

ServicesNorwegianbenchmark

2014

ServicesNorwegianbenchmark

2015




-

1

1

2

2

3

3

4

4

5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

B N

OK

Value Added Yards


The yards see the largest decline in activity in 2015

YARD SEGMENT


2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 8

Yards

12 %



Turnover 21.0 15.7 -25 %




2004-2011

CAGR 25 %

2004-2011

CAGR -12 %

0

2

4

6

8

10

12

14

16

18

20

Vard Kleven Ulstein Havyard

Bn

NO

K

jan.15 jan.16 Q2 2016

• Has Vard been able to break out of a negative trend?

• Kleven still has a large orderbook, and believe they can deliver positive numbers for 2016

• Ulstein & Havyard seems to struggle

Møre Yards – Order books

YARD SEGMENT

Order books at the four largest yard groups for 2015, 2016 and q2 2016

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 1 9

Number of offshore vessels in the

world orderbook compared to the

clusters development in turnover

The equipment producers are highly dependent on the offshore oil & gas market

MARKET DEVELOPMENT EXPLAINS THE CLUSTERS PERFORMANCE

0

200

400

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1400

1600

-

50

100

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Nu

mb

er o

fve

ssel

s

Turnover Equipment GCE Blue Maritime (Index) Offshore Order Book

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 0

Number of offshore vessels in the

world orderbook compared to the

clusters development in turnover

This holds to a large extent for the entire cluster as well

MARKET DEVELOPMENT EXPLAINS THE CLUSTERS PERFORMANCE

0

200

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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fve

ssel

s

Turnover GCE Blue Maritime (Index) Offshore Order Book

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 1

Demand side: 50 % reduction in oil price reduction in oil and gas operators spending

MARKET DEVELOPMENT EXPLAINS CLUSTER PERFORMANCE

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C: Brazil: Petrobras-scandal

Russia: EU sanctions after the Ukraine-crisis

- 5

10 15 20 25 30 35 40 45

B U

SD

2014

2015

20160

20

40

60

80

100

120

140

feb

, 20

11

jun

, 20

11

okt

, 20

11

feb

, 20

12

jun

, 20

12

okt

, 20

12

feb

, 20

13

jun

, 20

13

okt

, 20

13

feb

, 20

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, 20

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, 20

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, 20

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jun

, 20

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okt

, 20

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feb

, 20

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jun

, 20

16

USD

/Bar

rel

Supply side: The size of the offshore fleet has doubled during that last decade

MARKET DEVELOPMENTS EXPLAINS THE CLUSTERS PERFORMANCE

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 3

0

20

40

60

80

100

120

jan

.15

mar

.15

mai

.15

jul.1

5

sep

.15

no

v.1

5

jan

.16

mar

.16

mai

.16

jul.1

6

Nu

mb

ero

fla

idu

p v

esse

ls

Norway Møre Area

Supply side: The size of the offshore fleet has doubled during that last decade

MARKET DEVELOPMENTS EXPLAINS THE CLUSTERS PERFORMANCE

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 4

2017 is expected to be the turning point: Growth is expected to occur in 2018 both in the

Norwegian and international market.

MARKET DEVELOPMENTS – OFFSHORE OIL & GAS OUTLOOK

Expected change in key markets for the Norwegian oil and gas supply industry.

Source: Rystad (2016)

Investments in the Norwegian Oil & Gas Industry 2014-2015. Expected change in

2016 and 2017. Source: SSB (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 5

B N

OK

140

200

180

80

220

20

60

120

40

100

0

160

240

2013

153

20092008

179

129

2007

163

141

2011

-16%

132

221

-8%

2014 201720162001

91

2003

65

20152002

57

2005

73

20062004

55

2012

218

114

2010

151

195

97

Møre sales are falling faster than the world market and Norwegian competitors

2016 WILL ALSO BE A DIFFICULT YEAR

Turnover H1 2015 and H1 2016 (billion NOK). Source: Menon (2016)

Growth in turnover for shipping companies in Møre, Norway and globally in three

periodes. Source: Menon (2016)

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 6

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2009-2014 2014-2015 2015-E 2016

GCE Blue Maritime Norwegian Benchmark Global Benchmark

0,0

1,0

2,0

3,0

4,0

5,0

6,0

VardGroup

Farstad Havila Olympic IslandOffshore

Rem VolstadMaritime

B N

OK

H1 2015 H1 2016

• Order books relatively stable measured in number of ships – however composition radically changed

- Offshore vessels: From 80% to 45% in less than two years

- New orders Offshore vessels 0 in 2016 compared to 34 in 2014

- Fishing and Fish Farming vessels soon same number as Offshore

- Cruise and Passenger vessels growing in importance

• Two key questions:

1. Can the Yards be profitable in these new segments?

2. Can new markets replace offshore?

The cluster has an impressive ability to adapt to new market situations

ADAPT OR DIE

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 7

Figure 4-2: Order book at Norwegian Yards jan.2015-aug 2016. Number of vessels

(larger than >40m). Source: Norsk Industri

New growth oppurtunities

FUTURE PROSPECTS: OCEAN BASED MARKET OPPORTUNITIES WILL GROW

Size of different ocean industries in 2010 and in 2030 measured in value-added.

The numbers are annual growth rate for the period. Source: OCED (2016) New installed capacity , total installed capcaity and expected growth in the

offshore wind market 2015-2020. Source: IEA Mid-Term Market Update 2014

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 8

0

5

10

15

20

25

30

35

2013 2014 2015 2016 2017 2018 2019 2020

GW

Ny kapasitet Total kapasitet

20%

New capacity Total installed capacity

Three key challenges

• Productivity

- Since 2009, productivity in the cluster has stagnated, while the rest of the offshore oriented part of the maritime industry in Norway has improved productivity.

- Why has productivity stagnated, and how will it impact will the competitiveness in offshore markets when global demand starts to increase?

• Cluster composition

- The most distinguishing feature of the Møre cluster has been the tight value chain structure, with internationally competitive companies within the local cluster in all steps in the value chain. This vertical structure is under pressure of two reasons: a) The offshore shipping companies will probably consolidate, and ownership and headquarters may be centralized outside Møre. b) The ship designers and yards in Møre show an impressing ability to adapt to market changes by switching to other types of vessels, for example ferries, cruise ships and wellboats.

- How will cooperation, knowledge flows and cluster based innovation be affected when the buyer-seller linkages in the value chain are broken?

• Standardization and cost-efficient mass production

- Yesterday’s innovations are today’s standards, because customers will require standardized solutions to reduce their own costs.

- Will the Møre cluster be find sufficiently large and attractive market opportunities to capitalize on innovation capabilities?

FUTURE PROSPECTS: WILL THE CLUSTER RETAIN COMPETITIVENESS?

2 9 . 0 9 . 2 0 1 6M E N O N E C O N O M I C S 2 9

Documents

THE BLUE MARITIME CLUSTER CONFERENCE 2016 Net Operating Margin (Rolls Royce, Kongsberg Evotech, Scana, AxTech and Brunvoll) Net Operating Margin Equipment Operating margin GCE Blue