Boatbuilders cooling to China

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Production management at the Chinese plant of Rhode Island-based Gunboat International has been complicated by communication, compliance and warranty problems.

Production management at the Chinese plant of Rhode Island-based Gunboat International has been complicated by communication, compliance and warranty problems.

Manufacturing is projected to be cheaper in the United States than in China by 2018, and only seven of the 25 largest exporting countries now have lower manufacturing costs than the United States. Since 2004, U.S. manufacturers have improved their competitiveness, compared with every major exporter except India, Mexico and the Netherlands, according to a report released by the Boston Consulting Group this spring.

In 2004, for example, manufacturing in China cost 14 percent less than manufacturing in the United States. By this year, China’s advantage had narrowed to 5 percent. If the trends continue, Boston Consulting found, U.S. manufacturing will be less expensive than China’s by 2018.

Although the vast majority of American boats are built on U.S. soil, according to the National Marine Manufacturers Association, the industry is fragmented and relies on all types of parts and goods from a long and complex supply chain. As some suppliers begin to bring operations back to the United States, there also are global boatbuilders that recognize the benefits of manufacturing domestically.

Peter Johnstone, founder of high-end sailing catamaran builder Gunboat International of Bristol, R.I., bought a former Buddy Davis Boats manufacturing plant in Wanchese, N.C. The 36,000-square-foot plant is on the water and came at a bargain price because so many builders walked away from yards during the recession, Johnstone says. As a global company, Gunboat also runs a plant in China, but Johnstone is making some shifts with subcontractors to address ongoing issues he says he has had running operations there.

“I finally got the first boat out the door [from the North Carolina plant], and the quality and finish is stunning,” Johnstone says. “It’s much easier to do when it’s right under your nose. China, in the meantime, has been very frustrating. We have constant struggles with meetings, compliance, warranty issues — just across the board it’s a daily battle.”

Nordhavn says its Xiamen, China, factory has been in a continuous state of expansion since it opened a few years ago.

Nordhavn says its Xiamen, China, factory has been in a continuous state of expansion since it opened a few years ago.

‘There are challenges’

Echoing what Boston Consulting found in its most recent report, Johnstone says doing business in China is not as appealing as it used to be. “It looks cheap, but when you add up labor, cost negotiation, quality control, it’s a wash. There are challenges.”

For the time being, though, Johnstone says, it makes more sense to manufacture some of his boats abroad.

“I think with what we do, there are only a handful of people in the world that can produce the carbon boats we produce. We can only do so much at the moment in North Carolina. We have a handful of 60s in North Carolina. We build our 40-footers in Holland and the 60 in China.”

Johnstone says he and other manufacturers who have been contracting with a boatyard in China are pulling out after the Chinese yard rolled out knockoffs of the J/80 and a 56-foot Gunboat.

“J/Boats pulled out and we’re in the process of pulling out,” Johnstone says, adding that Gunboat is starting a relationship with McConaghy Boats, Australian expats who operate in China.

“I’m fairly confident in the McConaghy yard and their ability in producing the boat we’re accustomed to,” he says. “In the end there might be a slight savings, but it’s more about [how] we can’t do it all in one site. It’s too much business.”

In flux

Imports of power and sailboats to the United States from China totaled $41.4 million in 2013, representing 4 percent of the total, according to the NMMA’s 2013 Statistical Abstract. Exports of power and sailboats to China from the United States were $27 million in 2013, 1.7 percent of the total.

Last year U.S.-manufactured goods sold to China were up an overall 18 percent, according to Chad Moutray, chief economist for the National Association of Manufacturers. “That doesn’t mean we don’t have a large trade deficit with China, but they are up nicely. There are lots of references to this being the fastest growth we’ve had since before the recession. And another trend is, we have begun to reach pre-recession levels” for manufacturing domestically.

During the past decade, labor costs, adjusted to reflect productivity gains, shot up 187 percent at factories in China, compared with 27 percent in the United States. The value of China’s currency has risen more than 30 percent against the U.S. dollar during the past decade, according to Boston Consulting.

In short, labor in China is getting more expensive more quickly than U.S. labor.

“North Carolina has certainly proven its value to the brand in terms of being able to get out boats and have a proper production line here in the United States at a reasonable cost,” Johnstone says. “Having a service yard here is a huge benefit because we’re able to service domestically.”

Cheoy Lee Shipyards has been building boats in China since 1870.

Cheoy Lee Shipyards has been building boats in China since 1870.

Johnstone says he has eight 55s under way at any given time, just completed two 78s and the yard is under contract for a 100.

“We’re booming here,” he says. “With the level of business we have here we actually need twice the facility we have, so we’re reluctant to layer any more work at this particular location. If I had the facilities and space, I’d seriously consider doing it all here now. But I think that when you grow an operation, you want to pace your growth. North Carolina has gone from zero to 100 mph in two years.”

Skills gap

The U.S. landscape has grown so competitive that China, after decades of attracting manufacturing business away from the United States, is now creating jobs domestically, with Chinese companies investing a record $14 billion in the United States last year, according to the Rhodium Group research firm. Collectively, they employ more than 70,000 Americans, up from virtually none a decade ago.

Despite challenges, a skills gap is unlikely to deter companies that are looking to the United States as a manufacturing base, according to Boston Consulting. Because there are concerns about skills gaps in other major manufacturing countries, access to skilled labor in America is actually a strong factor in moving production to the United States rather than from the United States.

That could be both good and bad news for the boating industry — one that has long said skilled labor is hard to come by. Fluctuations in other industries, such as North Carolina’s once-thriving cabinet-making industry, have benefited boatbuilders such as Gunboat when an industry has moved on, leaving thousands of skilled workers without jobs in its wake.

On the other hand, some of the largest skills gaps were found in the high-skill occupation of machinists, as well as among welders, cutters, solderers and brazers, Boston Consulting found. Some of those labor gaps were most prevalent in boatbuilding and boat servicing areas, such as Miami and parts of Tennessee and Alabama. And high-skill manufacturing jobs persisted longer than other manufacturing jobs, with 58 percent of all high-skill jobs remaining open longer than three months.

That means that, moving forward, programs addressing skills shortages could become increasingly important, the firm says. Programs such as the partnerships between the Rhode Island Marine Trades Association and the Governor’s Workforce Board RI, or apprenticeships offered by Professional BoatBuilder, and all that continue to address the potential competitive issue could be critical.

A culture of (un)likely boaters?

Last year, a Chinese magazine geared toward wealthy travelers promoted a delegation of high rollers that came to the 40th Newport Boat Show at Lido Marina Village in Newport Beach, Calif. Beijing Sunbelt Media flew a couple of dozen Chinese executives in for the show.

The group told show owner Duncan McIntosh that yacht buyers could spend about half the price to buy a U.S.-built vessel as in China, but the excitement around the visit didn’t seem to last.

“We heard from them about three weeks after the 2013 show, nothing since,” says McIntosh, who also owns several publications. “We didn’t get any negative or positive feedback from any exhibitors as a result of them having attended the event.”

That seems to be an example of an overall trend in the excitement over China; for a few years, marine manufacturers seemed eager to tap this large coastal market, which boasted an increasingly affluent upper middle class. For some, that momentum has continued, but for others it seems to have fizzled somewhat in the face of infrastructure, taxation and cultural challenges that create barriers to recreational boating in the Asian nation.

In China, boating is referred to as “yachting” because people there believe the industry is primarily composed of large boats, says Ellen Hopkins of the NMMA. When NMMA president Thom Dammrich informed the Chinese boating industry that 95 percent of boats in the United States are under 26 feet, it was “a revelation.”

“From our perspective, boat manufacturing in China is growing, but is still an undeveloped and emerging industry,” Hopkins says. “Government taxation of boats is dampening demand, along with cultural issues surrounding the sun and the water.”

Hopkins touches on a cultural point that has traditionally coupled wealth with pale skin. Yacht builders that cater to the region, such as the Ferretti Group, say they have designed yachts with large covers to help shield the sun, which is quite different from designs for European and American markets.

Those who build there, sell there

“The Chinese boating culture is different from the U.S. boating culture,” says Yamaha Marine president Ben Speciale. “Boats tend to be very local. To understand why they are designed the way are, you have to really understand local customs and culture. In China, there are some people with a lot of money. I think they are very brand-aware, but they may not buy things for the same reasons they’re sold in the U.S.

“I think the cultures are totally different. What you need in a boat is very local in application,” Speciale says. “In China, you have to understand the local market. I know, for us, the marine business in China is very small, versus our U.S. business. Yamaha builds stuff in China, but we build there for the Chinese marketplace. It’s very local. Our marine business in the United States is the way it is because of how you accomplish goals for the consumer.

“If you go to China, you want to build there because you’re a global company and you’re selling there,” he adds. “You can build some component parts that way, but it’s not a fundamental part of the business. It’s about being very specialized and very customized, generally speaking.”

He says a growing investment in infrastructure could work to grow boating in the region.

“There’s little recreational market in China,” Johnstone says. “The boats being sold are largely sold to government entities [and] sailing schools. The typical person in China does not know how to swim and is not permitted on the water. The waters are closed waters. You can’t travel from port to port, and most waters are restricted from activity outside fishing. I would not expect to see the pleasure boat market growing there much in the next 10 years. I think that the Asian region certainly has market potential in areas where getting on the water is more of a tradition. Other areas have communities that are actively recreationally boating.”

Bright spots

Ferretti opened its first Ferretti Group China showroom in Qingdao in June, saying the company plans to open more showrooms in northern and southern China. Ferretti, which announced its plans during the May 30-June 1 12th China (Qingdao) International Boat Show, partnered with Speedo Marine, the official Ferretti Group dealer in China, and debuted Ferretti Yachts 870 for the first time in northern China.

In January, Ferretti Group shipyard CRN signed a letter of intent for the largest yacht sold in the Chinese market by CRN and Ferretti Group — a 68-meter (233-foot) superyacht in Weifang, a city in the central Shandong province. It is slated for delivery in 2017. Last year, CRN built the 80-meter M/Y Chopi Chopi, the largest vessel built at the shipyard in its 50-year history and among the 100 biggest megayachts worldwide.

The group celebrated the 10th anniversary of its launch in China at the 19th China Shanghai International Boat Show in April. James Henderson, president and CEO of Ferretti Group America, told Trade Only last year that China is a very specific and very much a developing market.

“Typically the people we sell to are in the $30 [million] to $50 million-plus range in terms of net worth,” Henderson has said. “The appetite for luxury lifestyle has grown tremendously in China and in a lot of developing countries. I think the thing that’s holding Asia Pacific back is lack of development and infrastructure. I spent two or three weeks last year traveling around China and looking at the infrastructure, and they are aggressively building new marinas. These aren’t just simple marinas; they are state-of-the-art facilities, and that is something that I think will accelerate over the next few years. But at the same time we have to introduce the Asian market to the yachting culture.”

The NMMA’s Hopkins says there is some boat manufacturing in China and it may someday be a threat to U.S. builders, “but that day is likely far off.”

This article originally appeared in the August 2014 issue.

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