2011 REPORT ANNUAL ANNUAL REPORT 2O11 HEAD OFFICE Via Genova, 1 - 34121 Trieste (Italy) ph. +39 040 3193111 - fax +39 040 3192305 MERCHANT SHIPS BUSINESS UNIT Passeggio S. Andrea, 6/A - 34123 Trieste (Italy) ph. +39 040 3193111 - fax +39 040 376969 NAVAL VESSELS BUSINESS UNIT Via Cipro, 11 - 16129 Genova (Italy) ph. +39 010 59951 - fax +39 010 5995379/272 MARINE SYSTEMS BUSINESS UNIT Via Cipro, 11 - 16129 Genova (Italy) ph. +39 010 59951 - fax +39 010 5995508 MEGA YACHTS BUSINESS UNIT Viale San Bartolomeo, 446 - 19126 Muggiano - La Spezia (Italy) ph. +39 0187 543238 - fax +39 0187 543239 SHIP Repairs AND CONVERSIONS BUSINESS UNIT Passeggio S. Andrea, 6/A - 34123 Trieste (Italy) ph. +39 040 3193290 - fax +39 040 3193890 The sea ahead fincantieri.com . ANNUAL REPORT 2O11 CORRADO AntonINI CHAIRMAN OF FINCANTIERI The crisis gripping the worldwide shipbuilding industry since 2008 has not eased; in fact, demand for new build continues to be very low, amounting to 32 million in compensated gross tonnage (CGT) in 2011 compared with 39 million in CGT the previous year, despite an apparently more promising start to the year. The more standardized categories of merchant ships have experienced a sharp decline, which has particularly hurt Chinese shipbuilders. The credit crunch, investment restraint and uncertainty about macroeconomic trends are the factors influencing the markets; but the reasons for the crisis in the shipbuilding industry also have their roots in the deep imbalance between demand and supply of transport, and therefore of new vessels. In our industry this imbalance can now be regarded as structural; the realignment of supply with demand is driving industry players to restructure and switch production in ways that are not always as quick and incisive as the situation demands. Back in the first half of the 1980s the global shipbuilding industry already went through a similar phase to that of today. A contraction in traffic combined with surplus freight capacity originating in the previous decade led to a collapse in demand for ships, a price war and heavy restructuring, with the industry workforce halved in Japan and Europe in the space of a few years. Similarly, the European shipbuilding industry is now in deep distress and has already seen the loss of 50,000 jobs: neither product specialization, nor home country system have generally defended the different players, while, in contrast, in the Far East, especially in Korea, China and more recently Japan, governments have propped up demand, including through programs aimed at encouraging green shipping. In Europe, for the time being it has been possible to achieve a new Shipbuilding Framework for State aid for innovation, applicable until the end of 2013 and which is hoped will receive prompt funding from the Italian government; it has also been possible to secure a favorable rewriting of the European Investment Bank’s Transport Lending Policy, which should provide better protection to European shipyards against unfair practices by non-European competitors. ANNUAL REPORT 2011 There are strong expectations surrounding the definition of a “new” industrial policy to tackle the industry crisis, which should incorporate the lines behind the LeaderSHIP 2015 program and materialize by the end of 2012, with the involvement of institutional, social and industrial stakeholders. However, it should be emphasized that the intensity and duration of the crisis are making it necessary to prepare to face a genuine watershed. The competitive geometry is also undergoing a profound change: niche markets are becoming more attractive because relatively more resilient to the crisis, with new entrants willing to accept risks and economic sacrifices, like in the case of cruise ships. Although the cruise industry is holding up better than other sectors during this difficult period and despite the existence of good potential demand linked to the development of new markets (such as Asia), shipowners have announced a slowdown in investment plans and are focused on boosting profitability rather than growth. This is resulting in a significant shortfall in demand relative to the capacity of European specialist producers in this sector. Although this market is smaller than in the past, it is still considered attractive by Asian competition, as confirmed by the reappearance of Japan’s Mitsubishi Heavy Industries in this sector with the acquisition of two new ship contracts. The challenges in the next few years will not be simple: more competition and less potential demand are inevitably putting pressure on new ship prices. But now other shipping sectors are also in a stand-by, almost stationary mode. The ferries market is proving to be increasingly complex. Environmental drivers could reignite some demand but adopting incentives is difficult, as is the financial commitment required of shipowners to invest in innovative vessels or upgrade old ones. Low freight rates and the resulting contraction in shipowner income have also led to a slowdown in ship repairs; shipyards must now face declining demand and growing competition, including by those players seeking to make up for at least part of the decline in their shipbuilding activities by re-entering the repairs market. However, positive drivers of demand continue to come from higher value, more complex work, such as the conversion and refurbishment of cruise ships and offshore vessels. The latter sector is still proving to be lively despite the crisis. The growing demand for energy and intensified deep-water exploration and production by the oil companies is driving demand for new vessels, particularly large drilling ships and, selectively, bigger and more expensive support craft. The highly uncertain economic climate is also affecting luxury goods sectors such as that of mega-yachts, where there are nonetheless a few positive signs. As for the military sector, despite the substantial increase in orders on the previous year, the major shipbuilders continue to face a general reduction in defense budgets and an increasing demand, in the case of contracts with foreign navies, for local construction. 4 5 These now established ground rules are making it difficult to fully utilize production capacity and are forcing firms to seek opportunities to diversify into other sectors, particularly renewable energy. Despite budget cuts, the US Navy is one of the few to have continued its investment programs in 2011; our Group’s US shipyards have benefited as a result, confirming it as one of the key players in meeting the country’s defense needs. The market scenario outlined above indicates how difficult it is to operate today in international markets where price has become the key variable, where production efficiency and product quality are indispensable conditions and competition is spreading into the area of financing schemes. The list of problems faced has stimulated Fincantieri to identify and undertake new courses of action aimed at improving efficiency and competitiveness and at expanding its product range to include new high-tech products. This is a far from easy task in the face of epochal changes, but we have gone through complicated times in the past and have never shown a lack of commitment and courage in facing them. The road ahead is now particularly complex: we must reshape our business for a new and different future starting from an old and solid tradition, while making the changes and breaks that changing market conditions, now and in the future, require us to make. This is an unavoidable path, but one we are facing with great determination by focusing on the necessary involvement of the many people inside and outside the business who contribute to making our outstanding products. CORRADO AntonINI Chairman of Fincantieri GIUSEPPE BONO CHIEF EXECUTIVE OFFICER OF FINCANTIERI Dear Shareholders, For the shipbuilding industry, 2011 appears to be the fourth year of crisis. International financial instability has triggered a dramatic watershed even in the real economy; for our industry this has meant a sudden collapse in demand for ships and a subsequent stabilization at levels insufficient to satisfy the global production system. Unfortunately, this impasse is destined to last in the future, along with the conversion and closure of many yards in the face of 50% overcapacity worldwide. In Europe alone, the last three years have seen direct employment fall by 50,000, without counting jobs lost in allied industries. Positions of privilege now no longer exist: only consistency and cogency of strategic direction pay, unavoidably dictated by greater competitiveness, production efficiency and price aggression. The management decisions taken by Fincantieri from 2002 until the onset of the crisis meant that in 2008 our Group was prepared to face the market adversities. In fact, between 2002 and 2008, Fincantieri grew by over 50% in revenue terms, with the same workforce, and posted excellent financial results. These results reflect important decisions not only to strengthen and diversify our business portfolio, but also actions in support of our industrial structure. With respect to the business portfolio, Fincantieri has vigorously pursued its leadership of the cruise market by consolidating its relationship with its main client and by diversifying towards smaller customers. Also in the civilian sector, Fincantieri has continued to diversify its products, by entering the super-luxury market with the offer of high-end mega-yachts. In the military sector, after years