Fincantieri grows high value-added business

11 Sep 2017
Monfalcone shipyard, along the coast from Trieste, is one of the world’s most prolific producers of large cruise vessels

Monfalcone shipyard, along the coast from Trieste, is one of the world’s most prolific producers of large cruise vessels

Having turned in a profit for 2016, and with a huge backlog of cruiseship and naval work, Fincantieri is sanguine about its prospects and is pursuing selective business and industrial expansion. David Tinsley reports.

Testament to an effective business expansion strategy and robust performance in target market sectors, Fincantieri has strengthened the workload throughout its worldwide shipbuilding network and increased the headcount at its Italian shipyards over the first half of 2017.

With a global production system spanning 22 yards in Italy, Norway, Romania, the USA, Brazil, Vietnam and the UAE, plus other related facilities, the Italian state-owned organisation ranks fourth in the international shipbuilding league. Its status as Europe’s largest shipbuilder stands to be reinforced by the acquisition of a majority holding in STX France, if finally sanctioned by the French government.

The outlook for the group in its current structure is in any case positive, given last year’s revenue climb and move into profitability, sustained through the first half of 2017, and a total order backlog of €25.5 billion (US$30.4 billion) as at 30 June, constituting approximately 5.8 years of work. The delivery programme extends into 2025 for cruiseships, while naval work stretches into 2026.

Against the backcloth of challenging market conditions and the parlous situation facing so much of the shipbuilding industry worldwide, Fincantieri occupies a privileged, albeit hard-won, position. The nature of its business planning and R&D resourcing as well as its policy of selective collaboration – of which more below – demonstrates its long-term vision.

The payroll in the group’s eight Italian shipyards saw a net increase of 300 during the opening six months of 2017, continuing the pattern of the past three years. The workforce in Italy thereby stood at 8,269 on June 30, with a total 19,428 employed globally.

Niche sector focus

The central focus on the high value-added sectors of cruiseship and naval construction is elemental to the whole. While global shipbuilding market conditions deteriorated through 2016, with very low demand for most types of merchant ship and offshore vessel – a situation which has shown only marginal improvement so far in 2017 - levels of new investment across the cruiseship market have been a compensatory factor benefiting specialist builders and subcontractors. The cruise sector accounted for 44% of Fincantieri’s overall revenue in 2016.

Last year the group secured the lion’s share of the global surge in cruiseship orders, logging firm contracts for 25 vessels. The figure rises to 32 if memoranda of understanding and letters of intent are taken into account. With buoyant activity continuing into 2017, Fincantieri signed new orders and agreements covering 12 cruise ships during the first few months of the year. More tonnage for the Princess Cruises and Holland America Line brands of the Carnival Group figures in the latest inflow, along with ships for Viking Ocean Cruises and new clients Virgin Voyages and Norwegian Cruise Line.

The affiliated Vard Group, five of whose yards are in western Norway, has emerged as a force in the market for smaller classes of cruise vessel. This is a direct result of a diversification policy implemented to counter the profound deterioration in the offshore market, Vard’s mainstay work source.

Fincantieri has recently raised its holding in Vard to just over 78%. Industrial synergies have been developed in the cruiseship sector by using Vard’s Romanian yard to produce hull sections in support of the Italian shipbuilding network. At the same time, Fincantieri is providing key components and technical assistance to Vard in connection with its contracts for expedition cruise vessels.

The latest addition to the workload is a 182-metre research expedition ship, the brainchild of Norwegian industrialist Kjell Inge Rokke, for prospective charter to companies, institutions, environmental groups and individuals. The hull will be built by Vard Tulcea in Romania, then towed to Vard Brattvaag in Norway for outfitting.

Renewal and expansion

Fincantieri’s other main plank of operations, naval vessel construction, is also experiencing high-volume activity, attributable both to the Italian Navy’s renewal programme and to the company’s strategy of expansion in the export market.

A major contract signed in 2016 with the Qatari Ministry of Defence and worth €3.8 billion (US$4.6 billionn) represented the most significant commercial milestone of the past 30 years in the naval shipbuilding business. The deal involves the construction in Italy, and concentrated at the integrated Riva Trigoso and Muggiano yard system on the Ligurian coast, of four corvettes, one amphibious ship, and two patrol boats, amounting to six years’ work. In addition, the contract includes the provision of support services in Qatar for a 15-year post-delivery period.

Fincantieri Marine Group, the US arm of the organisation, with three yards on the Great Lakes, has also augmented the naval component of the workload by sealing an order for a further Freedom-class littoral combat ship (LCS) for the US Navy.

Two new developments, namely the bid for France’s major shipbuilder and the new foothold in China, stand to extend Fincantieri’s capacity and market reach.

In May this year, the Italian group announced that it had signed a share purchase agreement for the acquisition of 66.66% of the share capital of STX France from South Korean-owned STX Europe, for a purchase price of €79.5 million (US$95.2 million). Operator of the country’s showcase St Nazaire shipyard (the former Chantiers de l’Atlantique), STX France has reinforced its position in recent years as one of the pre-eminent cruiseship and naval builders. The French company, in which the state has a one-third holding, produced revenues of approximately €1.4 billion (US$1.7 billionn) in 2016, with a payroll of about 2,600 and more than 500 regular subcontractors.

Fincantieri’s chief executive Giuseppe Bono had stated: “The business combination with STX France... will help to accelerate the process of consolidating the European shipbuilding industry and to create a European player with recognised technological leadership, with a unique client and product portfolio and a presence in every higher-value shipbuilding segment, and therefore better equipped to react to market fluctuations and international competition.”

Mounting resistance

However, mounting French political and social resistance to a foreign takeover since the change in the French presidency during May has led to further, ongoing discussions. The possible entry of French state-owned defence company DCNS (recently renamed Naval Group) among the shareholders in STX France, as desired by the French government, is viewed as positive by Fincantieri, which has long collaborated with DCNS in the military field. Closer ties could lead to further development of naval business.

Towards the end of July, Bono reported that: “Negotiations are still under way with the French government to define a satisfactory governance structure for STX France and we are confident that their closing will address the condition, non-renounceable for us, that the combination of the two companies be a value-adding proposition.”

But following incoming President Macron’s review of the transaction, France is now seeking a deal whereby Fincantieri ownership would not exceed 50%, and would therefore not assume majority control. Both sides are(were) looking to an outcome by the end of September.
The other, seminal initiative concerns a China-based shipbuilding joint venture which is set to cut its teeth on the construction of cruiseships incorporating Fincantieri know-how.

China’s long-held ambition to become a competitive international contender in the cruiseship market moved a further, vital stage towards realisation in February this year when the joint undertaking of Fincantieri and China State Shipbuilding Corporation (CSSC) signed a memorandum of agreement with the joint venture of CSSC and Carnival Corporation for two cruise vessels to be built in China. Options could take the eventual series to six ships, tailored to the fast-growing Chinese cruise market, which is expected to become one of the world’s largest in the near future.

China milestone

That milestone pact was followed in May by the Italian group’s signing of a letter of intent with CSSC and Shanghai City’s Baoshan district to create an industrial hub dedicated primarily to cruise ships. Both Fincantieri and CSSC will promote the complex in their respective supply chain networks, creating opportunities for participation by both Italian and Chinese companies.

Fincantieri’s approach to business growth is characterised by selectivity, orientated as it is both to higher value-added sectors and products and to internalising the highest value-added activities so as to create what the company describes as a true “upstream yard” system throughout its industrial sites. This foresees a dedicated, largely internal supply network, capable of innovating and building value for Fincantieri and for the economies of the countries and regions involved.

A recent expression of the group’s bid to increase the value of its overall design offering and newbuild ‘package’ was the agreement with GE Power to co-develop a new, exhaust emission control system. Motivated by the upcoming implementation of IMO’s mandatory 0.5% worldwide sulphur cap in 2020, the planned Shipboard Pollutant Removal System will address not only SOx but also particulate matter(PM) emissions. Although the main focus will be on cruise vessel applications, the solution will be suited to other types of ship operating on heavy fuel oil.

During July, Fincantieri sealed a cooperation deal in the field of research and innovation with Milan-based Mapei, a specialist in chemical products for the construction sector. From the shipbuilder’s perspective, the partnership is intended to help optimise installation times, reduce material weight, improve acoustic insulation through the use of specific products, and develop and extend the use of adhesives in ship construction.

The group is also taking a majority stake in Isselnord, an Italian company engaged in the defence market and in civil industrial sectors in logistic support engineering, maintenance and information technology fields. The move, which envisages eventual full ownership of Isselnord, is in line with Fincantieri’s development of its naval services business. Furthermore, a memorandum of understanding has been signed with energy group ENI covering R&D in areas including the natural gas transport chain.

Fincantieri ploughed €96 million (US$116 million) into research, innovation and development in 2016. Maintenance of high levels of investment in R&D is seen as vital to ensuring competitiveness in commercially- and technically-challenging markets, where product and process innovation is a key factor for success.