Financial implications of digitalisation within the marine farming industry

Dag Sletmo, Senior Vice President – seafood analyst at DNB Bank

There is a pressing need for innovation in the marine farming industry, due to the industry having in many ways exhausted the technological resources it currently has at its disposal.

Overshadowed by the steady setting of new financial records – in the form of export value, margins and stock trading prices – slaughter volumes have stood still since 2012. The reason being that the industry is from a sustainability perspective utilising capacity to its full extent. Government authorities are therefore restrictive in dealing out new licenses, and we are also seeing that many of the industry’s participants have problems in utilising their existing licenses to their fullest extent.
The bright spot in this slightly gloomy picture, is that sustainable capacity for salmon farming is not a mathematical figure bestowed upon mankind by an Almighty Creator. It is however a function of regulations and technology, which is why, regulatory and technological innovation can increase capacity. The authorities’ crucial contribution has been the implementation of development licenses that involves the opportunity to acquire a license very cheaply providing one takes into use innovative technology. That has prompted an avalanche of new ideas. The large, spectacular steel constructions have more or less stolen the spotlight, as with Salmar’s offshore rig. Possibly less well-known is that this rig has 20,000 sensors and that Salmar is working with big data and artificial intelligence (AI) in connection with this rig. The objective is to enhance understanding of the fish, the environment, and the interaction between the two. Kongsberg Maritime, SINTEF and NTNU are all part of the team.

A digital surge
A digital revolution is taking place in commerce and industry. It has progressed furthest in industries that do not have physical products, such as for example media. The banking sector now finds itself well and truly in the midst of the digital tornado. If your core products can be translated to 0’s and 1’s, you are vulnerable to digital chops. However, it is the more traditional industries that are being “hit” to an increasing degree. The taxi sector is feeling the pressure from Uber. Hennes & Mauritz is being squeezed between Zalando, which is exclusively an internet retailer, and Zara, which is traditional but has been more proficient at utilising digital technology as a tool to better understand its customers and to achieve more flexibility in its supply chain. As with taxis and clothes, the salmon cannot be translated to 0 and 1. Nonetheless, it will be affected in the same way by changes driven forward by digital technology.

These changes are for the most part positive for the general public as we are then offered better and cheaper products. But for industry players it can turn out to be a zero-sum-game where some win and others lose. In the media sector the winners have been companies such as Facebook, Google and Netflix, while the losers have been local printed newspapers and TV stations across the globe. Consumers have perhaps decidedly been the biggest winners due to an enormous supply of worthwhile services that are free. Such a dramatic outcome won’t be the case for the salmon industry. But it will still be capable of having tremendous significance.

We believe the most important effect will come through improved understanding of the fish, the environment, and interaction between the two. This will provide enhanced knowledge that in turn will enable us to produce larger volumes with the same or lower pressure on the environment than is currently the case. Key technologies will be cheaper sensors that can compile data, the Internet of Things (IoT) that can send data from the marine farms and environment to the data cloud, and artificial intelligence that can provide us with new insight. NCE Seafood Innovation Cluster in Bergen’s AquaCloud project is such an example. This is technology that can transform the industry. But perhaps it isn’t here we will see the most notable effects first.

Accelerated development of knowledge
Digitalisation generally begins with the streamlining of an individual process, such as in the increasing practice of feeding the fish by remote control from on shore, rather than from the edge of the farm cage. This way some wage costs are then saved, but it doesn’t turn things upside-down. This is an example of “doing things the right way”. The major effects stem from “doing the right things”, which is AquaCloud’s department. That usually takes longer time. But it doesn’t mean that the players can lean back and wait until the “doing things right” stage. By then it would presumably be too late. The transition between these two stages should be controlled and gradual. When feeding is carried out from land, this provides an environment for the accumulating of expertise in feeding. Data that is used in the feeding control centre on land can eventually be fed into machine learning programmes. Ultimately, there will come a day when the data machine has become more skilful at feeding the fish than the best farm worker. Traditional technology develops relatively slowly while digital technology takes an exponential course. This means that if you as a business have been lagging slightly behind the past 10 years in relation to traditional technology, it is nonetheless possible to catch up again. Maybe you lie 20 percent behind the best. But if technology improves by 20% per annum for 10 years, the others will be more than 500% ahead of you. There’s no way you’ll ever catch up.

Digitalisation varies in significance for the different segments of the marine farming value chain. Producers are possibly those that have least risk of being affected by digital disruption because they are protected by the licenses. Presumably the industry would profit from digitalisation because it would bring back volume growth. Higher volumes might exert negative pressure on prices and margins in a transitional phase, but in the longer term profit will be higher due to the high, underlying growth of consumer demand. Most of us think of offshore and land-based fish farming as presenting the biggest challenges to traditional fish farming, but there is also a digital element here. The entrance barrier in very many industries is the accumulated knowledge the industry has developed over many years. With digitalisation the rate at which knowledge is developed incurs at a much higher pace. This means that the advantages accumulated through 50 years of knowledge and experience in traditional salmon production have lost much of their value in relation to land-based and offshore activities.

Digitalisation creates and offers new ways to approach problems
Feed suppliers are an interesting case in relation to digitalisation in the salmon industry. Traditionally they have in many ways been the “the brains” of the value chain – they are the ones who have had a lot of people with white coats and doctorates on their staff. But does having digitalisation mean that producers will gain knowledge on a par with that of feed suppliers, and that they will then just regard feed suppliers as big mix-masters of raw materials? That would have an extremely negative effect on profitability. Or would it go to the other extreme – if the feed suppliers were to outshine the producers in utilising the new technology and increase their lead on knowledge? Then they could perhaps introduce “feed-as-a-service”, where they can ink a contract that they won’t sell 10 thousand tonnes of feed to one producer, but that they would instead supply 10 thousand tonnes in the form of an increase in biomass, achieved through their feed, of which they were also responsible for the feeding operation from their control room at a location somewhere else in the country. Additionally that they receive a bonus if they achieve more than 10 thousand tonnes, but must give a discount if they don’t achieve the target.

Digitalisation opens up for numerous ways to approach problems. One example is that new knowledge via big data will presumably allow major producers to steal the march on small producers. However, if the small players manage to cooperate on shared data platforms, it doesn’t need to be that way. Or the Norwegian State could decide that all salmon production licenses are required to send relevant data to the data cloud, where they would be accessible to the general public. Another problem is that overcapacity has been deliberately planned in parts of the value chain in order to cope with seasonal fluctuations and biological crises. Would better data access throughout the value chain provide enhanced coordination and management that results in such reserve capacity becoming less important? It could have significance for feed companies, wellboat companies, slaughter plants, and many others. Will new players such as Alibaba and Amazon open up new markets and also enable small players to build own brands, or will they take control of the whole value chain and squeeze the margins of all other players? Are we thinking in terms of too much hardware in Norway and too little software when we are developing digital solutions?

Digitalisation represents a tremendous opportunity for the marine farming industry, but also poses a threat for those players who haven’t kept themselves up-to-date. A sign of the times was illustrated by Grieg Seafoods’ title for its capital markets day in autumn this year: “A salmon farming pioneer entering the digital era”. Let that be an example to follow.


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