Exporting to a changing worldPosted on Written by Reagan Haynes
Western European markets sag, but U.S. builders see potential riches in Russia, Brazil and Asia
Many U.S. boatbuilders have been working to ramp up export sales and are breaking into new territories all the time. Their ventures are not without challenge, but even in these economically difficult times they are also loaded with potential.
The hurdles can be daunting, as parts of the globe wrestle with debt and economic malaise and Europe struggles to find a resolution to Greece’s debt crisis.
Brazil, one of the most fertile grounds for an emerging marine industry, has decided to levy heavy taxes on imported boats and other products. That could give American builders with facilities in Brazil, such as Brunswick Corp., a significant advantage because they will not be subject to the tariffs.
At the same time, new free-trade agreements with Panama, Colombia and particularly South Korea could help open new markets for U.S. builders.
Currency fluctuations make international markets challenging, although the weak dollar has its silver lining, too, making American boats more attractive to overseas buyers and encouraging builders to bring some of the production that has been taking place in China back to the United States.
Despite the ups and downs, many builders still see exports as a vital element of their future growth.
“We believe that near-term growth opportunities are going to be outside the United States,” Brunswick chairman and CEO Dustan E. McCoy told investors at a quarterly earnings call in October.
Western Europe, traditionally an export hot spot, has been plagued by perhaps an even worse economic malaise than the United States. In early November, the threat of a Greek default continued to loom large, and several other nations also were on shaky ground. The European economy continued to flounder, as eurozone nations failed time and again to reach an agreement on the Greek crisis.
Although 2011 data are not yet available, revenue gleaned from U.S. boat exports to Western Europe in 2010 was less than half of the $806.4 million peak that was recorded in 2008. In 2009, the export business pulled in only slightly more than $365 million.
Even though 2010 was somewhat better, with slightly more than $382.4 million in revenue reported, some speculate that 2011 might see another dip because of the lingering debt crisis in Greece and economic strife in Italy and other countries.
The good news is that increasing sales to less traditional markets — think Algeria or the United Arab Emirates — contributed to an overall improvement in exports in 2010. According to data from the National Marine Manufacturers Association, boat exports increased 21 percent, to $1.7 billion, last year. That was up nearly 50 percent from the 15-year average of $1.2 billion, NMMA spokeswoman Ellen Hopkins says. Still, boat exports were down nearly 30 percent overall in 2010 from their peak in 2008, dropping from $2.5 billion to $1.7 billion.
Overall, more than a quarter of boat and engine exports, in dollar value, went to Canada, at $602 million, followed by Western Europe, at $514 million.
“Most of the world economies are strong, with the exception of the United States and Western Europe,” says Bill Yeargin, president and CEO of Correct Craft. “Many of these economies are emerging economies, so they are not yet strong boat markets, even though they will be.”
Correct Craft’s international sales have been very strong, increasing to almost 50 percent of the company’s sales this year, Yeargin says. Last year, international sales accounted for about a third of the company’s revenue. “Domestic sales are actually up, too, but not near as much as international sales,” Yeargin says.
American Marine founder and CEO Gordon Burgess has primarily focused on Europe during the 20 years that he has operated his Florida-based yacht export business. Burgess has emphasized wholesale and trade-ins, but recently added brokerage to his repertoire to increase share in an ever-shrinking market.
“They still are [buying in Europe], but that market is nothing like it used to be,” Burgess says.
The European market’s slice of sales is dramatically less — “a lot less than 50 percent” — than it was three years ago, when sales in England, Norway and Sweden dominated his business, Burgess says.
Once he realized that sales to Europe were lagging, Burgess branched into markets such as Australia and New Zealand, launched the brokerage arm and started pouring money into online advertising internationally. That exposure is very expensive, he says, but it “gets us into a whole new array of markets.”
From North Africa to Dubai, Burgess is seeing revenue diversifying over the world. Although most of those markets are small, they add up, he says.
Australian demand has hit some bumps, too, Burgess says, although sales there help offset lagging European volume, particularly because the seasons are in contrast.
“Generally, the biggest problem with the pricing market is the exchange rate is favorable and, as soon as it backs off a little bit, people don’t think it’s good enough,” Burgess says. “They think it’s much worse in America than it is. They think America’s on its knees, so they think [boats] should be dirt cheap, but that’s not the case. The boat industry is not doing that bad.”
There are fewer Europeans inquiring about Hinckley Yachts, but those who are inquiring are typically looking for high-ticket items, and often they’re buying, says Phil Bennett, vice president of The Hinckley Company.
That helps make exports “a significant percentage of our business,” Bennett says.
“Yes, they are looking for good value, but the people really looking are shopping for the best boat,” Bennett says. “Just like in the United States, there are people who have retained their wealth and also made money.”
Some European buyers are building bigger yachts and are using the sailboats as tenders, and others want a vessel to keep at new vacation homes, “so our European business is strong,” Bennett says.
Mallory Marine Products is another company that has seen success in Western Europe during the last few years. Ohio-based Mallory is a manufacturer and OEM supplier of marine parts. Its parent company, Mr. Gasket, has several divisions that have provided parts to major OEMs, such as Mercury and Volvo.
Because it specializes in aftermarket products, or parts purchased by current boat owners, Mallory has capitalized on European boaters who want to repower or fix old vessels instead of trading up, according to company director Jim Self. “We’re taking market share and expanding distribution,” he says.
The international portion of the business is up 30 percent this year, and the company exports to nearly 40 countries, he says.
“Because we’re relatively new in the export market, we’ve seen big double-digit growth year over year for the last eight years,” Self says. “That growth slowed a bit this year, but I think that was because of the bad weather here in the United States,” which prevented boaters from getting out on the water and requiring boat repairs.
“Every product in the marine industry is not export-friendly, but if there’s an opportunity there, anyone who’s not taking advantage is really missing out,” Self says.
It might be difficult to see a connection between U.S. cotton subsidies and boats, but they are definitely related in the world of international trade, much to the chagrin of the U.S. marine industry.
Brazil has been threatening to impose tariffs on a range of U.S. products in retaliation for U.S. subsidies to American cotton farmers, which Brazil says undermine the Brazilian cotton industry. Those threatened tariffs would have increased the duties on powerboats from 20 percent to 40 percent, says Cindy Squires, chief counsel of public affairs and director of regulatory affairs for the NMMA. They would affect yachts, inboard sport or pleasure vessels, rowboats, canoes and PWC imported only from the U.S., Squires says, but would exclude outboard boats.
Those retaliatory tariffs were put on hold after the U.S. created a fund to assist Brazilian cotton farmers, paying them $147 million a year, says Jim Currie, director of federal legislative affairs for the NMMA. That fund became an issue when the Agriculture Bill came up in the House of Representatives, Currie says.
“The debate is over next year’s payment,” he explains.
“That deal is what some on the Hill have been attacking,” says Squires. “We are working with a coalition of affected industries seeking to have the cotton dispute resolved to avoid these retaliatory tariffs.”
Completely separate from that discussion was Brazil’s decision to increase the duty on all boats imported into the country, Squires says. Effective Sept. 15, the duty on sport boats and leisure boats and engines rose to 35 percent instead of the previous 20 percent. That action, too, applies to pleasure boats other than outboards.
Those tariffs extend to boats imported to the other Mercosur countries (Argentina, Paraguay and Uruguay), as well as Brazil from non-Mercosur countries. Mercosur, sometimes called the “Common Market of the South,” is South America’s largest trading bloc.
“But Brazil is clearly the big dog in this and, as I understand it, it was Brazil’s manufacturers who wanted some protection there,” Currie says.
“When you add 15 or 20 percent to a boat’s price, that’s a pretty significant increase, so this is not something we welcomed on the part of Brazil,” Currie says. “Protectionism is not a good thing, we don’t think.”
Brazil continues to discuss levying import tariffs on U.S. goods in response to the cotton dispute, says Squires. “We have continued to work with a broad coalition on the cotton issue because it would cause an additional 5 percent increase in the tariff from current levels,” she says. “We are quite concerned about this recent tariff increase and are hopeful that it will be reversed in the future.”
The BRIC countries — Brazil, Russia, India and China — are all considered up-and-coming economies in the developing world, Currie says. “We’d love to have a free-trade agreement with them, but that’s not going to happen anytime soon.”
But there are some glimmers on the trade front.
Free-trade agreements reached with Panama, Colombia and South Korea should help bolster the U.S. economy and perhaps directly help boatbuilders, Currie says.
Although Panama and Colombia might be less fertile ground for growth in the marine export arena, South Korea has the potential to be a strong boating market, Currie says.
With 50 million residents, a gross domestic product of nearly $900 billion a year and nearly 1,500 miles of coastline, South Korea has plenty of potential for exporters of boats and other marine goods.
The agreements ran into some trouble in the House, Currie and other lobbyists had been told, so the National Association of Manufacturers urged builders in all sectors to contact their representatives to emphasize the importance of the bills, Currie says.
The National Association of Manufacturers says the agreements probably will bring upward of $13 billion in new export revenue to U.S. manufacturers, according to Currie.
“I don’t know how much of it will be in our sector, but it could add as many as a quarter of a million manufacturing jobs in the United States,” Currie says. “Anything that helps the overall economy helps the boating industry.”
South Korea has not had a long history with recreational boating, but has expressed great interest in the last several years in launching a national effort to draw citizens to the activity.
“None of these agreements will go into effect until next year at the earliest because other countries have to ratify them, and they’ll have to work out which products will be brought in duty-free and which ones would be phased in,” Currie says. “I think South Korea is the big one. Once we get to zero on tariffs there, our manufacturers are looking to take advantage of that economy right now.”
Hot on the heels of the Nautique Asian Championships in Malaysia, Correct Craft has focused very intently on Asia, says CEO Yeargin.
The United States and Western Europe have a lot of consumer confidence problems because of the ongoing debt crises, Yeargin says. “The good news is, in Asia, there’s a huge migration taking place from rural communities to the seaside, and that’s combined with significant economic growth,” he says. The bad news, he says, is that there are significant freshwater problems and overfishing problems.
Also, things work differently in Asia, Yeargin says. “Even in the non-communist countries, someone in the government will decide, ‘We need to be in the boating business,’ and send money to the boating business,” he says. The last time he visited South Korea, Yeargin says he was told that the government was spending “significant money” to help Korean companies break into the recreational boating industry.
“We haven’t really started competing because they haven’t started delivering product yet,” Yeargin says. “It will take them a while to figure out how to build a quality product, but eventually it will be a big challenge for U.S. manufacturers — certainly in the next five or 10 years. It’s not all bad because it forces all of us to be more creative and figure out how to build a better product for a lower price.”
With the Chinese economy booming and more than 9,000 miles of coastland, the country has been on the radar of U.S. recreational boatbuilders for a few years.
“The economy is exploding, but they don’t really have much of a [recreational] boating culture,” Yeargin says. “That’s part of it; another is developing relationships and finding dealers and trying to work on plans to help develop that culture.”
At the International Boatbuilders’ Exhibition & Conference in October, Mallory Marine was approached by a customer based in China who was interested in growing distribution there, Self says. “He said the market is very limited, but they see opportunity growing and they want to be one of the first ones in there, so long-term I think it’s going to create an opportunity for us,” Self says.
Mallory Marine has no significant initial expectations from its relationship with China, Self says. For now, the company is cultivating a presence and finding someone there who can work to develop the market.
“We’ve got to start somewhere, and it seems like a great opportunity with someone there to see what we need to do to be successful there as things grow,” Self says.
As an aftermarket component manufacturer, Mallory’s growth potential only would be realized after the Chinese invest in recreational boats, use them for a while and need to fix them, Self says. Until China develops a recreational boating infrastructure “we’re really limited in what opportunities we have,” Self says.
That shift might come sooner than many people think. Last year, two Chinese residents bought Hinckley yachts, Bennett says.
“We had two Chinese nationals who literally could go anywhere in the world and buy anything they wanted and they came to The Hinckley Company, and [those boats] are going to be exported back to China for private use,” Bennett says. “The culture of recreational boating is not widespread, but there are some individuals who are very worldly and have, in fact, been boating.”
China’s growth might be more good news for American builders and the U.S. economy.
Mallory Marine already has manufacturing facilities in China, so the company could take advantage of the low overhead, Self says. “But that’s changing, too,” he explains. As the Chinese economy improves and its labor and raw material costs go up, “there’s stuff we’re moving back to the U.S. because we can do them more economically here,” Self says.
Currie says he is not surprised by that.
“In fact, I think the Chinese are finding that they are not as competitive because as their economy and their wage scale grows they’re having to compete with other countries, just as others have had to do with them,” Currie says. “Japan used to be a low-cost manufacturer. Then it was Korea, then China, and now it’s moved to places like Singapore, where the wage scale is lower.”
China’s economy is booming and Congress was considering penalizing the country if its government didn’t let its currency float freely, Currie says.
“I think it’s indisputable that they do control their currency that way,” he says. “But as the U.S. dollar loses against the overall [world] economy it makes our exports more competitive. If you’re exporting stuff, this is great for you because it makes your exports so much cheaper” for other countries.
Despite the worldwide economic malaise, most believe there always will be a market for luxury goods.
“When people get nervous, yet they see the big clock ticking on their lives, the one thing that happens is they will buy things they feel have lasting value,” Bennett says. “They put off so many life decisions for so long waiting for something to be perfect that now they’re saying, ‘It’s not going to be a perfect world and I’m not going to be in this world forever, so I better enjoy it while I’m here.’ I’ve been in the boating business for 40 years and I’m seeing a major restructuring of priorities for many people.”
This article originally appeared in the December 2011 issue.