Of Slow Boats And China...

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Of Slow Boats And China...

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Life is now very tough for yachtbuilders the world over and it's going to get a lot worse before it gets better, says Phil Draper.

MAY 2008

Well it was a good run, wasn’t it?
In general, ignoring the odd blips – such as 9-11 and troops going into Afghanistan and Iraq - we’ve enjoyed a dozen or so years of bonanza.
Demand for production boats just got better and better in most parts of the world from the mid ‘90s through until just recently and just about everyone should have benefited. The accepted wisdom for the period was ‘if you can’t make money when things are this good, you should be doing something else’.
Having said that, it has to be said a handful of boatbuilding operations faired a lot, lot better than everyone else. The big beneficiaries were what we now refer to as the ‘Euro-Majors’ – the likes of Groupe Bénéteau, the Ferretti Group, Azimut-Benetti, Sunseeker, Bavaria, Princess, Fairline and Cranchi. And a handful of others are not too far behind them. All these operations’ capacity expansions and market aggression on a global scale really paid off over the period and in the main their turnovers have just kept climbing, often on the back of what seemed to be an insatiable demand for ever-bigger models. Similarly prosperous were the new-build superyacht yards around the world.
But ever since the ‘Sub-Prime Crisis’ kicked off last summer in the USA, the gloom and doom from the financial sector has got steadily worse and the ripples have started to impact other industries, most economies. Most of the European boats shows last autumn didn’t really register any significant slowness - but since January things seem to have cooled considerably. One prominent sales and marketing director at one of the big companies told me recently that confidence at the dealer level in most major markets was now really dire and channels were beginning to get clogged by stock, something that hasn’t really been an issue since the early ‘90s.

"This slowdown shouldn't be a surprise... We all knew the growth rocket had to run out of steam eventually... 'Cyclicality' has always been a fact of life in this industry." 

So is it a case of here we go again? Seems so.
But as unwelcome as it is, this slowdown shouldn’t be a surprise. We all knew the growth rocket had to run out of puff eventually. Despite what some of the more gung-ho private-equity investors have suggested, cyclicality has always been a fact of life for this industry. There were demand peaks of the ’60s and the ‘70s, the boom and bust of the ‘80s, the slow down of the first half of the ‘90s. Sure this slowdown has been a long time coming, but it was always going to get here eventually.
The present slowness hasn’t registered in everyone’s results yet, however. Forward-order commitments hide what’s happening. Most industry watchers were probably surprised, for instance, that the publicly quoted Groupe Bénéteau’s recent third-quarter results continued to show good growth. But one would be very surprised if its projections beyond its August 31, ‘08 year-end showed anything other than a contraction (unless of course, say, an acquisition or two were to boost the top line). It has been particularly aggressive over the past nine months or so with its pricing, and no doubt boosting its marketshare along the way, but there’s only so much that can be done to buoy things when retail enthusiasm ebbs.
Recent industry soundings confirm that consumer confidence is really low just now, not just in Europe’s major markets, but globally.
But if you think things are beginning to look grim in Europe, spare a thought for the Americans, or at least the ones that aren’t managing to get a boost from the weak dollar in export markets. The US, which has been having a tough time for a couple of years, is really suffering at the moment. Look no further than the announcement by the Brunswick Corporation, by far the industry’s biggest player, that it was ‘re-sizing’ its business to maintain profitability in what it sees is as a substantially smaller domestic market environment and that meant reducing its fixed-cost structure by some USS$300 million, to be achieved by almost halving the number of plants it has and reducing its establishment by thousands.
As for boat sizes the smallest boats have been hit the hardest, but contrary to the popular view that the big-boat scene is recession proof, the numbers there are also said to be under pressure. While it is true the bigger the boat the better the demand, even at the superyacht end of the spectrum is starting to cool, although most of the builders of really big boats won’t register any slowdown for several years as their order books carry them so far ahead.
So the big question is how low will it go? That’s the billion-dollar, billion-euro question. Reading this present crisis isn’t easy. We’re on new ground. Even the top economists are raising their palms and shrugging.
And beyond the financial markets, there’s a lot of other stuff going on too. Historically sky-high oil prices always impact consumer confidence. We know that from ‘70s’ experience. And there’s the continuing impact that China and India are having on the rest of the world.
This autumn’s new-season shows will be very interesting.
Deep breaths everyone!

© Phil Draper