Published: October 2018 [rev. edition December 2019]
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This study researched the drivers and mechanisms of both structural and non-structural horizontal and vertical integration in the seafood industry in all Member States with a coastline. The objective of the study was to identify trends among the Member States.
The observed trends generally fall into three broad, inter-linked categories: regulatory environment, natural resources and firm performance.
You can download the full study here: Research for PECH committee: Seafood industry integration in all EU Member States with a coastline.
You can also navigate the study country by country. For each country you will find the following information:
- Key Findings
- Composition of the seafood sector
- Producer organisations
- Company analysis
Use the map below to select a country of your choice:
The degrees, mechanisms and drivers of both structural and non-structural integration vary significantly among the EU Member States with a coastline (see Table 90 for an overview). These processes are affected by a broad range of different factors, many of which are inter-linked in diverse ways. This chapter will describe the observed trends and present an analysis of the influencing factors identified within the scope of the research at hand.
The observed trends generally fall into three broad, inter-linked categories: regulatory environment, natural resources, and firm performance. The remainder of this chapter is organized as follows: section 26.1 describes how regulatory environment factors influence the processes of integration; section 26.2 outlines the natural resource factors that influence processes of integration; section 26.3 details the influences of firm performance on integration, and; finally, section 26.4 provides a conclusion based on these observations.
Within the broad category of factors under regulatory environment, this research identified a number of key factors driving or hindering various forms of integration. These are: ease of access; regulatory clarity and stability; and; the fisheries management system.
Ease of access
Ease of access has two aspects. Firstly, the ease with which fish processing companies can invest in fish catching companies, and vice versa. Secondly, the ease with which fish catching companies can enter the market or increase the size of their domestic fleet.
In a few countries, such as Denmark, it was reported that it was difficult for processing companies to invest in fish catching companies due to strict regulatory requirements. Danish legislation requires that investors in fish catching companies are themselves also fishermen. Conversely, fish catching companies find it difficult to invest in processing companies due to unfamiliarity with the business.
However, in countries such as Spain and Bulgaria, legislation and regulatory processes do not obstruct structural vertical integration. In Bulgaria, it was mainly fish catching companies developing processing facilities. However, this strategy was also motivated by a desire to benefit from value-adding and to access broader markets for their products. In Spain, processes of both up- and downstream investment were observed. These were motivated by a desire to add value to products and access new markets, and a desire to guarantee stable supplies of raw materials at stable prices respectively.
In countries where vertical integration was hindered by strict regulations, non-structural processes of vertical integration were more common. Examples are Denmark and Italy.
Ease of access can also help or hinder both domestic and international processes of structural horizontal integration. In Sweden, for example, there is a legislative requirement that fishermen owning Swedish fishing companies must be Swedish citizens. As a result, there may be some domestic horizontal integration, however, foreign investors do not play an active role in Sweden. In a number of other countries, such as Latvia, Lithuania, Belgium, Finland, Germany and the United Kingdom, higher levels of foreign investment were found. Companies from the aforementioned countries were generally not found to engage in foreign investment themselves. This may be due to firm performance, ease of access to capital, or other factors as listed here.
In addition to administrative forms of ease of access, another influencing factor is the market condition. Estonia and Spain have fewer bureaucratic obstacles, however, the market conditions in these countries reduced the levels of foreign investment. Estonia has a strong group of fishing companies that are financially stable and strong enough to invest in other countries. Therefore, foreign investors find it difficult to enter the market. In Spain and Portugal, the level of competition for very low levels of quota due to overcapacity in the sector are unattractive to foreign investors.
Regulatory clarity / stability
In three countries in particular, lack of regulatory clarity and stability have affected processes of integration, namely Bulgaria, Italy and Romania. These regulatory issues can be domestic and EU level. On a domestic level, a lack of comprehensive vision for the fisheries sector affects the structuring of a regulatory framework. A clear comprehensive vision for the fisheries segment can facilitate the development of regulations that consider the strengths, weaknesses, opportunities and threats of the relevant fishery segment. It was beyond the scope of this research to identify instances where regulatory environments were conducive to the development of the fisheries segment in the countries under analysis. However, it can reasonably be concluded that in countries with a strong fishery segment, a conducive regulatory environment is sure to have played a role in its development. Where the regulatory environment is hindering the development of the sector, respondents mentioned this during the interviews.
For Italy, sector stakeholders indicated a lack of a national vision for the fisheries segment. As a result, the domestic regulatory framework was fragmented and restrictive. Therefore, fish catching companies tend not to engage in structural vertical or horizontal integration. However, processes of non-structural integration were observed that deal with issues of regulatory uncertainty or restrictiveness. Companies pooled their resources as a form of informal horizontal integration or engaged in offtake arrangements in order to guarantee the sale of their products.
In Romania, unstable legislation was seen to hinder downstream investment in processing facilities. However, horizontal integration was commonly observed. The opposite was found in Bulgaria, where vertical integration was more common as fish catching companies sought ways to increase their income. These companies found it more difficult to increase their fleet sizes.
Fisheries management system
In the previous study from 2016 that covered a smaller selection of EU Member States, it was observed that the fisheries management system was not a driver or hindrance to processes of both structural vertical and horizontal integration (Warmerdam et al, 2016). This broader study of all Member States with a coastline confirms that the different fisheries management systems themselves do not alone drive or hinder integration. Whether the system is individual quota, individual transferable quota, gear licenses, or other management system, companies engage in horizontal integration to access more resources, and vertical integration to add value to their products and guarantee the sale of their harvest. Countries such as Belgium, France, Ireland, Bulgaria and the United Kingdom have not implemented the ITQ system. Other countries, such as the Netherlands, Finland, Latvia, Lithuania, Estonia, Spain and Portugal have implemented the ITQ. However, there are strong variations in the levels of integration between both sets of countries and among the countries in the respective sets. This indicates that other factors are more relevant to explain the processes of integration.
Nevertheless, the fisheries management system did play a role in foreign horizontal integration into the Finnish pelagic segment and hindered the development of vertical integration. Until 2017, Finland maintained a ‘Olympic’ fisheries management system. As this system meant that the companies which fished the most and the quickest harvest the most, it was difficult for companies to maintain a stable supply of raw materials. Therefore, even though they were active in the pelagic segment where vertical integration is more common (see 26.2.1), domestic pelagic fishing companies did not engage in vertical integration as they lacked a stable supply of raw materials. This is likely to change though since Finland introduced the individual quota system for herring and salmon in 2017. It is still too early to observe related trends.
When Finland still applied the ‘Olympic’ fisheries management system, it was attractive for Swedish, and in particular Estonian fishing companies. Both Sweden and Estonia apply the ITQ system. Therefore, these foreign investors would first harvest in Finland until the fisheries were closed, and then spend the rest of the year fulfilling their respective Swedish and Estonian quotas.
A number of factors related to natural resources were found to influence the processes of integration. These were: fishing segment; access to sufficient fish stocks; and; historical factors.
As a general trend in most of the analysed countries, particularly those with fishing activities in the North Sea, Atlantic and Baltic Sea, many fishing companies active in the pelagic segment have engaged in structural vertical integration.
This is due to a number of factors. Pelagic fisheries are considered a relatively ‘clean’ segment. There is not a lot of by-catch and specific species can be targeted precisely. As such, the supply of raw materials is more predictable and stable. Moreover, the catch volumes in the pelagic segment are far higher than in the demersal segment. Therefore, firms operating in the pelagic segment can have higher incomes. These higher incomes and more predictable/stable supply of natural resources give them sufficient financial resources to engage in downstream vertical integration. The motivation to do so is to generate additional income through value-adding processes, and to put the firm closer to the end market, thus potentially strengthening its negotiating position.
In a number of countries, such as Denmark and Sweden, there was not a high degree of structural vertical integration in the pelagic segment. Companies in these countries were noted to sell their catch to processing companies in the region, such as in Germany or Norway, or at auction. In Denmark it was reported that investment in the processing industry was expensive, and that fishing companies therefore preferred informal offtake arrangements to guarantee the sale of their products.
In the demersal segment, much of the landings are sold directly in the harbours or at auction. This trend was observed in nearly all of the assessed countries. The demersal segment, with its bottom trawling practice, generates a lot of by-catch. This affects the predictability of the supply. Additionally, the catch volumes in the demersal segment are smaller than the pelagic segment. Both these factors significantly affect the financial income of fishing companies active in the demersal segment, often hindering downstream investment in processing. In France, one case of vertical integration in the demersal segment was observed. However, this was a process of upstream investment by a retailer with sufficient financial resources. Moreover, many demersal species are in fact not suited for industrial processing. Consumers prefer fresh or frozen demersal species, over canned or dried/smoked/salted products.
Both structural and non-structural vertical integration was rarely observed in countries targeting predominantly demersal species, such as Belgium and France. In countries with large pelagic sectors, such as the Netherlands, the Baltic States, and the United Kingdom, structural vertical integrated was observed more frequently.
Access to sufficient fish stocks
In a number of countries, particularly in the Mediterranean, and in Portugal, a lack of access to sufficient fish stocks was hindering both vertical and horizontal integration. Low levels of fish stocks and/or fishing grounds meant that these fisheries remained small-scale. This may also relate to the targeted species, mainly demersal, bluefin tuna and small pelagic. Countries such as Cyprus, Malta, Italy and Greece have started to develop strong aquaculture sectors in response to insufficient fish stocks.
Historical factors in fact relate to fish stocks, as quota is allocated on the basis of historical track record. In the Netherlands, this was found to be an important driver of horizontal integration, and later vertical integration. With the closure of the North Sea herring fishery in the late 1970s, Dutch fishing companies started fishing in the seas around the United Kingdom. As a result, when the negotiations regarding the CFP were taking place, these companies could lay claim to quota both in the North Sea and in the seas around the United Kingdom. This historical coincidence put fishing companies, particularly those engaged in the pelagic segment, in a strong position and at an advantage over their peers.
In both Spain and Portugal, however, the opposite was found. These countries have an overcapacity in their fleet in relation to their TACs (which are based on historical catch records). At the time of the CFP negotiations, the Spanish and Portuguese economies were not as far developed as their northern peers, likely impacting their fish catching activities, particularly in the pelagic segment. However, as Spanish companies lacked EU quotas, they invested further afield with fishing activities in Latin America and Africa.
Two factors related to firm performance affected the processes of vertical and horizontal integration. Firstly, income and profitability. In countries where vertical integration was observed this generally pertained to fish catching companies investing in processing facilities, such as in Bulgaria, the Netherlands, Estonia, and Germany. To a certain extent this relates to the fishing segment that companies are active in (see section 26.2.1). The pelagic segment generates more income than the demersal segment. Companies with more financial resources not only invested in downstream processing, but also expanded their fleets both domestically and internationally. The three Dutch pelagic fishing companies, due to both historical circumstances and good business strategies, have developed into fully integrated fishing groups with activities in both the demersal and pelagic segments, both domestically as well as elsewhere in the EU, and have invested downstream into processing, distribution and brand marketing.
Where firm performance is not strong enough to engage in downstream investment, POs have played a role in downstream activities, including processing, cold storage and logistics, and marketing. In a number of countries, such as the United Kingdom, Estonia and Poland, fishing companies also own producer organisations.
The empirical analysis attempted to quantify the impact of horizontal integration on employment factors, income and productivity (see Chapter 2). It found that the number of employees is not affected by any measure of horizontal integration. However, wages and salaries of total crew decrease 5.5% on average when the average number of vessels by enterprise increase by one vessel. In terms of income, all three measures – income from landings, live weight of landings and value of landings – decrease with integration. Additionally, vessel productivity decreases with integration. On the other hand, sector productivity – as measured by days at sea, fishing days, or number of fishing trips – is not affected by integration.
An explanation for the decrease in estimated salaries, income and vessel productivity may relate to the fact that vessels which are acquired may become ‘inactive’, as was observed in a number of Member States. The quota is then harvested by another vessel within the company group. Therefore, the average figures decrease. However, sector productivity does not decrease as the active vessels may be utilized more intensively to maximize their efficiency and fulfil their capacity.
Regarding processes of both structural and non-structural, vertical and horizontal integration, a number of trends are observed. Non-structural integration is more common where structural integration may be hindered. For example, where the development of structural vertical integration in hindered by costs, ease of access to or unstable supply of raw materials, offtake arrangements are more common. Fishing companies are driven by the need to guarantee the sale of their products. Offtake arrangements allow them to satisfy this business need.
Similarly, non-structural horizontal integration through quota swaps, trading, leasing and renting, takes place where legislation permits these activities. Fishing companies seeking to optimize their fishing plans, and fulfil their obligations under the discard, engage in this non-structural form of horizontal integration. In situations where there are insufficient fish stocks or quotas, fishing companies have pooled their quotas in order to share the income and costs.
Various factors drive or hinder structural integration. The research at hand has found that the form of fisheries management system is not key in explaining the differences. Regulatory environment, natural resources and related firm performance are key. Where there is a stable and sufficient supply of natural resources – and consequently sufficient financial resources – companies have engaged in both vertical and horizontal integration. Fishing companies have engaged in horizontal integration, both domestically and internationally, to increase their supply of raw materials. Having a broader fleet portfolio allows these companies to maximize the use of their assets with less need for informal processes such as quota swapping or renting. The regulatory environment plays a key role in facilitating companies to integrate both vertically and horizontally.
This research has found that a variety of factors influence the processes of integration. These factors generally fall into three categories: regulatory environment, natural resources, and firm performance. Moreover, the research has also found that integration has an impact on salaries, income, and vessel productivity, but not on sector productivity. Given that recommendations to improve the regulatory environment and access to natural resources could have impacts on legislation, and the fact that the empirical findings are based on general national level data, one key recommendation is that further econometric analysis is needed. This econometric analysis should be carried out on a company level dataset. This company level dataset would consist of information on a more comprehensive list of companies that have and have not integrated both vertically and horizontally, including detailed information on their financial performance, productivity, employment, total number of vessels, number of active vessels, among other indicators. The econometric model would compare the economic indicators of interest (employment, income and productivity) under cases of integration vs no-integration to isolate their effect; and by using fixed effects at the company level, the model would allow control for individual characteristics of each company.
Such a comprehensive and detailed EU-wide seafood industry company-level dataset does not yet exist. However, this study has already laid the groundwork and developed the resources needed for such a dataset.
The suggested econometric analysis could feed into policy recommendations that mitigate the negative impacts of processes of integration and maximize their benefits. The present study has found that companies and countries where structural integration has taken place were more able to develop financially sustainable fish plans, respond to changes in legislation, and strengthen the negotiating position towards buyers of their products. Respondents in this study stated that where integration has taken place, in some cases there was a negative impact on employment, however, in general the conditions in the sector improved.
A further recommendation from this study is for relevant organisations at the national level to develop comprehensive visions, coherent and reliable legislative frameworks for the fisheries sector. The present study has found that in several countries fishing companies still state that there is room for improvement.
Another recommendation relates to the access to natural resources. In countries with sufficient natural resources, both structural vertical and horizontal integration were more common. However, availability depends on several factors, not all of which are under the control of national authorities. For example, maximum sustainable yields are regularly adjusted to maintain sustainable fisheries, impacting fishing companies’ access to the natural resources. In several countries where access to natural resources was limited, particularly in the Mediterranean, aquaculture was developed.
This is an attractive segment for fishing companies to invest in, as well as for fish processing companies to secure supply. Policy frameworks incentivizing aquaculture development in resource-scarce jurisdictions could generate both employment and income for local seafood companies.
A final recommendation is to foster the development of markets for non-TAC and by- catch species. In light of the discard ban and of stock restrictions in some fisheries, this could prove an effective channel for fishing companies and processing companies to maximize their financial performance while minimizing waste and overfishing.