Salmon industry in Chile: an industrial resilience case Juan Pablo Zanlungo

Parallel 1.1 Common problems, common markets and shared value creation

11 November 2014

SALMON INDUSTRY IN CHILE: AN INDUSTRIAL RESILIENCE CASE?

JUAN PABLO ZANLUNGO MATSUHIRO

DEPARTAMENTO INGENIERÍA INDUSTRIAL, UNIVERSIDAD DE CHILE

Context

• Today the industry exports about U$3,5 billion

• Dominates the world market, along with Norway

• It is known as the “third engine” of the national economy

• After the ISAv crisis (2009 : 89 outbreaks), the disease was reduced to isolated cases (2013 : 3 outbreaks), (2014: 2 outbreaks)

What will we understand by Industrial Resilience?

Which elements allow would us to classify the evolution of Chilean salmon industry crisis as a resilience case?

How can we explain the accelerated recovery?

2008 2010 2012

630.000 tons 450.000 tons 820.000 tons

How was the organization of the cluster altered?

Is the industry more sustainable today?

What role did the collective–share actions play on managing the crisis?

What remains to be re-set?

Balanced View: a resilience system, afterundergoing a disturbance is able toresume its natural growth path. (a) and(b)

Ecologist View: equilibria are arbitrary, and any crisis should force strong enough effects for a system to adopt a new pattern of behavior (c) and (d)

INDUSTRIAL RESILIENCE

Figure 1: Stylised Responses of a Regional Economy to a Major Shock. Simmie & Martin, 2010

Normalized Recovery Paths post ISAv crisis

Chile Faroe Islands and Norway

T0 is the year in which production reached its lowest level as a result of the health crisis.

Differences between paths

• Norway has learned to live with the virus (fjords structure favors them)

• Faroe Islands shut down all production and operation of sea farms.

• Chile learned from these experience and also received support from the Canada to design a way out of the crisis. Regulations in place today are more stringent than in Norway.

THE EVOLUTION OF THE CRISIS IN THE CHILEAN SALMON INDUSTRY (2007-2010)

The crisis in numbers

• 26.000 unemployed

• 50% decrease in production

• US$ 5.000 million estimated cost

For a year the number of operating sea farms was less than the maximum "positive" infected sea farms (January 2009)

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2005 2006 2007 2008 2009 2010 2011 2012 2013

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Salmon Production 2005-2013

Estadísticas Sernapesca (Ton)

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Actors, networks and institutions

• Trade Association dominated by large companies

• Weak Regulations

• Increase in the granting of concessions

Orientation to Production

• Catching up in production with Norway since 2001. A race to get to 100,000 tons per producer, and become a global player

• Geographic concentration of Production• Increasing outsourcing, deregulated, following cost

reduction criterion

Trends that led to the crisis

Fuente: Informe sectorial de Pesca y Acuicultura, enero 2014, SERNAPESCA

RESPONSE MECHANISMS DYNAMICS ASSOCIATED

• Production Frontier Expansion

• Changes in the Value Chain

EXPLANATIONS FOR AN ACCELERATED RECOVERY

• New regulatory policy and institutional framework

• Financial Rescue

New regulatory and institutional framework (2010)

• Forced breaks in system organization: "salmon neighborhoods.”

• New and more stringent standards for production-logistics and required certification

• Greater supervisory authority

Financial "Rescue"

• Change in the legal conception of the public good in concession to private

property: Concessions could now be traded between private

actors, and used as a collateral to get credits from the bank industry

• US $ 450 million purchase of mortgage debt concessions (US $ 2,000 million estimated total debt)

• Indexing health risk to financial risk (in addition to stock trading companies)

Dynamic associated: Production Frontier Expansion

Associated dynamic:

Production Frontier Expansion was already available

Associated dynamic:

Production Frontier Expansion and changes in the production distribution across regions

Associated dynamic: Production Frontier Expansion

Insufficient provision of Public Goods• Enabling Infrastructure (linked to the operation and installation of

new families)

• Connectivity and LogisticsGaps

• Employment and job quality

• Human Capital formation

• R&D + i

NEW CLUSTER

Changes in the Value Chain

– Automating processes– Demand for workers is reduced in the core of the chain

(freshwater, seawater, process)– Territorial Expansion of services– Changing weights in relative powers (customer-supplier)

Changes in the Value System

– Complexity / Sophistication (Biosafety, Health, Environmental)

– Migration of talents to suppliers

– Emergence of Knowledge Intensive Business Services

– Financial industry oversight

A MORE SUSTAINABLE

INDUSTRY?

• Acknowledgement of environmental and sanitary limitations (how far you could get)

• Consensus on what to ‘stop doing’ (industry measures)• A clearer and better equipped public system. More clarity what must the state

require, inspect, subject to fines.

It is clear that we know better and are alarmed,But have we passed the examination of resilience?

Export (US$ billion) Budget (US$ million)

2,207 (2006) 19,68 (2007)

3,517 (2013) 45,3 (2014)

Export (US$ billion) Fines (US$ million)

2,242 (2007) 0,74 (2007)

3,517 (2013) 1,4 (2013)

148% local funds

81% local funds

Health Status in the frontier zone expanded renew commitments and actions geared

More % production losses

Less operating sites, but more sea lice

Are there old practices that must be eliminated? New challenges:

• Major changes to strengthen enforcement at the individual firms level

• New diseases of local expression

Fuente: Elaborado en base a datos Sernapesca 2010-2013

Concerns about sanitary status in the expansion zones have produced a renewed commitment and has provided guidance to new initiatives

A few years ago I made a similar presentation and called it “Health crisis in the Salmon Cluster; learning lessons process” (6to CLAC, 2011)… Today I would say … “Lessons in consolidation process”

Start up (2014-15) of new health regulations

• Risk Score

• Density Regulation

• Reducing Seeding

Industrial resilience and sustainability are not only related with sanitary issues. It also involves industrial structure reconfigurations.

Sanitary crisis & financial crisis

Production Concentration by recent Merges and Acquisitions Most visible cases:

• AquaChile bought Invermar• Mitsubishi is in the final negotiation for Cermaq• Marine Harvest is now taking control over Aquinova

In the near future, 80% of production will be concentrated in 12 actors. At ISAv climax (2009) they were 19.

COMMON-POOL RESOURCES, INSTITUTIONS AND COLLECTIVE ACTION

• The case of collective use of resources: 'Tragedy of the commons‘

• Self-governance of firms ends collective crisis. Freedom implies a

'commons' eventually ruins all ¨ (G.Hardin, Science, December 1968)

Institutions and Rules of the Game

• The institutions have been created to reduce uncertainty in exchange North (1991)

• The rules must include security, portability, durability, divisibility, flexibility and exclusivity of property rights. Ostrom (1990) & Anderson (2007)

Generating Collective Action

Trust Ranking OECD 2008

Legatum Prosperity Index (35 position Chile)

A major challenge in Chile

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Nevertheless... A successful resilience path was based on

• Reaction at the industry level. Taking immediate health regulations themselves (self regulation).

• Quick public legislative action(urgency given by the political context -

2009 presidential elections ad portas-, and the international financial crisis)

• Head of the “Salmon Industry Roundtable” acted as de facto delegate of the President, thus in practice by-passing the formal institutional structure of the state.

• Changing status of concessions. Start up of Health Regulations, Surveillance Plans.

• Rescue from financial world.

TASKS FOR THE CONSOLIDATION OF THERE-SET Resilience as adaptive ability

Securing Health

Enforcement Standards and MonitoringBetter information to focus and prioritize the audit processSanctions (highest and largest)

Coordinated WorkSea lice treatments and baths

Assess the implementation of the new regulationsExpect measurable results, while eliminating redundancies

R+D+iFocus on local diseases e.g. Piscirickettsisis (SRS)

• Strengthen coordinated efforts at different levels

State-Industry-Academia. Strengthen social capital• National Level (recovery of cluster promotion policy)

• Meso-Regional

• Regional

• Macro zones and Neighborhoods

• Installation of shared value as a paradigm of the industry • Improve links with territories

• Seize Windows of Opportunity• e.g. joint KIBS export, at least to Latin America

• Addressing Gaps to regain competitiveness

17 TH TCI GLOBAL CONFERENCE | CREATING SHARED VALUE THROUGH CLUSTERS FOR A SUSTAINABLE FUTURE

THANK YOU

JUAN PABLO ZANLUNGO MATSUHIRO

DIRECTOR PROGRAMA CLUSTER Y TERRITORIO

zanlungo@dii.uchile.cl