Not the least bit disruptive - current thinking about salmon industry growth

Salmon farmers caught in the act of thinking about the future.

Thanks to some of my recent blog posts and work I’m doing with one of my consulting clients, I’ve had the opportunity to participate in some interesting conversations on the future of the salmon farming industry. They have given me cause to reflect on the process of pursuing innovation and generating investor interest in concepts that challenge the existing paradigm of an industry that has grown fat and rich thanks to a winning combination of extremely high barriers to entry and a global market that is chronically short of salmon.

There are generally three types of innovation:

1)        Efficiency innovation – efforts focused on doing more with less or producing more from existing assets – Mowi’s recent announcement of an intention to grow to 600,000 metric tons through better use of existing licenses and improved fish health outcomes is an example

2)        Sustaining innovation – efforts focused on making good products better. Arguably, most salmon industry efforts in the offshore farming sphere fall into this category. Although they are billed as being part of efforts to grow the industry, the barriers to entry are so enormous and the conditions in nearshore sites are arguably deteriorating so rapidly very little growth are likely to come from these projects in the near term.

3)        Disruptive innovation – this is a sexy term that gets thrown around a lot in conversation, but which frequently misses the mark.  A key element of most disruptive innovations, think of mainframe computers to smart phones, typewriters to personal computers, horses to cars, etc. is that they make the technology more accessible and affordable over time.

Constraints on current thinking

In the salmon industry, offshore projects like Ocean Farm 1 and land-based projects like Atlantic Sapphire have been heralded as disruptive to the existing paradigm of salmon farming, but they’re not. They may be great projects, but they’re not going to disrupt the industry – they play into the existing trend of corporate consolidation and reinforce industry structures. Keeping in mind the definition of a disruptive innovation, I can think of a few reasons why this is the case:

Investment threshold – any way you slice it, land-based farming and current efforts around offshore farming are the playground of the super-rich. Both may be considered sustaining innovations if they allow producers to maintain production in the face of increasing challenges with existing operations, but the capital investment required to build in either direction is beyond the reach of all but the largest and wealthiest actors in the industry. Individuals may be able to participate in these efforts through an investment in shares, but they will be passengers only.

Barriers to entry – in most regions, the ticket to ride is a farming permit/license or concession. Historically, it was possible for an enterprising individual to apply for and secure a farming permit. Today, I think I am safe in saying, that process has moved beyond the capacity of someone with modest means to navigate. This is absolutely the case for offshore farming projects that involve a permit or license – even the task of gathering environmental and benthic data can run into millions of dollars. With land-based projects, permits may be easier to secure but this is frequently not the case.

Scale – both current approaches demand scale at levels that will eliminate all but the largest players from potentially succeeding. Capital costs in land-based systems are generally so large that, on paper at least, the only way to offset them is to produce a lot of fish under high intensity conditions. In theory, a modestly scaled land-based system is conceivable but in practice, failure is more the norm. With offshore projects, this is also the case. Some planned projects are more affordable than others but, the engineering approach – which I would describe as 99% attempting to adapt existing farming systems to an offshore environment – is leading the industry towards even larger, more expensive production platforms.

Technological complexity – in most examples of truly disruptive technologies, innovation has created the opportunity for more people to engage with technology. Think about cameras. Prior to the advent of smartphones, cameras and processing film were expensive and I am old enough to remember that you needed to be careful about not wasting film. With smartphones, we all carry around incredibly sophisticated cameras and snap away freely. In the case of both land-based and offshore projects, technical complexity is increased, scale is larger, and fewer people are employed in the process.

Logistical support – this likely applies more to most offshore projects and less to land based, but the logistical systems required to operate currently conceived systems, will further limit the involvement of anyone other than major players. When I was a wet-behind-the-ears salmon farmer in BC many years ago, I considered applying for an oyster license but couldn’t figure out how I could afford the vessel I’d need to operate a farm. (Probably lacked sufficient ingenuity) For anyone considering an offshore project, conditions will require extremely sophisticated and expensive support vessels. You not only need to have the cash to build the system, but you’ll also need to build an entirely new support network around you. With the resources of their oil and gas industry, Norway has an advantage here, and if the offshore development continues in the same direction going forward, even more of the industry will be concentrated in Norwegian hands.

So, what’s the alternative then?

If we want to significantly increase supply and make salmon more affordable, we need to develop concepts with fewer constraints on growth – the scarcity, expense and complexity of applying for a license to farm in a specific area is 100% a function of bureaucracy and user-conflicts. If you added up the surface area all the salmon farms in the world, it would be speck on the map. The fact that a 4,000 metric ton farm in Norway has a price tag of over $100m US (just for the license) reflects an artificial scarcity.

Is there a reason why current concepts in both land-based and offshore salmon farm development are just beefier versions current systems? One reason, I think, is that the industry is a victim of its own success. RAS hatcheries helped produced incredible improvements in smolt quality and farm productivity so it was, perhaps understandable, that extending successes achieved in those early stages to full grow-out would make sense. Similar story with offshore – as farmers moved into more exposed, high-energy locations, they saw significant biological improvements and it was natural to look to offshore locations for even better results. The problem, in both cases, is that following that linear path leads into more expensive and more complex operating models and more expensive fish.

Would you recognize a disruptive technology if it smacked you on the side of the head?

Looking at the history of truly disruptive technologies, they almost always came from outside of the industry. As industry insiders, we are likely trapped in our thinking about how things should be done and a radically different approach would strike us as crazy. We are probably looking at things wrong. For example, most of us consider a site license an asset. It’s only an asset because they’re so hard to get – if the requirement for a license is removed, it serves no purpose and has very little value.

I’m working with one of my consulting clients on a project which, I think, has potential to dramatically expand the production of salmon, eliminate the artificial logjam on farming licenses, reduce the scale and risk for the farming platform, and do so using proven, off-the-shelf technology. In conversations with potential investors and industry insiders, I have been struck by how reluctant most are to engage with a concept that seems so foreign and yet consists entirely of proven components combined in a novel way. For investors, the idea of being the first to invest in a novel approach is poison. For industry insiders, they are tied to the idea of a restricted and highly regulated permission to farm as having value and are full of fears over having to navigate a new regulatory framework and operating system.

It will be interesting to see how this plays out. I’ve had recent experience with another project where a blockbuster of a tool for salmon farmers struggled to gain traction with investors despite 100% of salmon farmers saying they desperately needed it. It’s a weird industry and too soon to tell.

If you are still reading, I salute you. Feedback, questions, comments can be directed to info@AlanWCook.com or via LinkedIn.