Unknown Territory

Tariffs are forcing builders to decide whether to stay the course with export strategies or evaluate new markets
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Although retaliatory tariffs have hurt exports, some U.S. builders are hesitant to invest in new markets.

Although retaliatory tariffs have hurt exports, some U.S. builders are hesitant to invest in new markets.

American boatbuilders have seen rising costs and supply shortages as a result of tariffs on steel and aluminum, but it’s retaliatory tariffs from Canada, the European Union and Mexico on U.S.-built boats that are pushing some to evaluate their export strategies.

Still, some U.S. builders are hesitant to make large investments in emerging markets, pointing to recent pushes in China and Brazil that fell flat because of a shifting political climate or a fledgling boating culture that didn’t grow rapidly enough to justify the return on investment.

“I continue to believe that the global market is going to be a big percentage of our sales over time,” says Correct Craft CEO Bill Yeargin. “Right now, it’s still about 30 percent. We’ve invested heavily in setting up dealers. We’re in 70 countries now, and when we started this international push we were in about 35.”

The company is trying to lay a foundation for long-term global markets, and it has paid off, Yeargin says. But a big part of that strategy depends on the large number of boats exported to Canada, the European Union and Mexico. “Those are a big part of our markets,” he says. “I hope it shakes out soon, but you’ve got to be able to pin that hope on something. I don’t see anything I can point to and say, I think this will be over by May. None of us knows what’s going behind the scenes.”

Uncertainty

Small boatbuilders in particular should evaluate their supply chain and export strategies, says Rebecca Torres, a retired diplomat with the Foreign Commercial Service who served in the International Trade Administration.

Torres says an escalating trade war could throw the economy into a recession, and that’s when international sales become critical to U.S. builders. “You always want to keep things diversified so if one lags, you have another to fall back on,” she says.

In addition to U.S. builders, tariffs also have impacted the global industry. Italian marine trade association UCINA wrote the E.U. parliament president to say that the trade dispute has “effectively frozen the export market.” It has urged the European Commission to work with the U.S. Administration to achieve an “enduring solution that allows the boating industry to continue its economic growth.”

The lack of clarity alone is a major hurdle for boatbuilders, says Phil Smoker, vice president of sales at Smoker Craft. A December announcement that Canada’s retaliatory tariffs had been repealed resulted in orders from the company’s Canadian dealers that were “so immediate it was crazy,” Smoker says. “Then we heard about the retraction, and we were very disappointed.”

Canada accounts for about 20 percent of Smoker Craft’s annual business, and since July 1, when the tariffs went into effect, those sales are down almost 60 percent.

Canadian dealers are waiting for a resolution of the tariff situation before placing orders for U.S.-built boats.

Canadian dealers are waiting for a resolution of the tariff situation before placing orders for U.S.-built boats.

“We saw after that announcement that there is pent-up demand from our Canadian dealers and that the tariffs are holding us back,” Smoker says. “They’re still ordering boats but not at the levels they have been. We haven’t pushed our dealers up there yet for orders. We’re pretty realistic and know where we’d be if we were in their shoes. But we also think that they need to start making orders in the first quarter for the second quarter. Based on inventory levels, we feel those dealers will want to bring in products.”

Smoker Craft grew 20 percent domestically for the third consecutive year, which is fast enough for U.S. dealers to absorb the declines. “But we need for the Canadian business to come back,” Smoker says.

Year-to-date boat exports in October were up almost 17 percent in units and 18 percent in dollars, says Julie Balzano, senior director of export and workforce development for the National Marine Manufacturers Association. That’s likely because the tariffs were announced in May but weren’t implemented until the summer, so dealers in Canada, the European Union and Mexico had a two-month window to place orders.

“Some dealers I’ve spoken with have put their orders on hold and are waiting with bated breath,” Balzano says. “So 2019 should show positive growth if tariffs are lifted sooner rather than later because of pent-up demand.”

It’s been “somewhat surprising” to see an increase in exports of Malibu and Cobalt boats to Mexico, says CEO Jack Springer. “In Canada, inventories were already low, so there’s a need to restock,” Springer says. “It’ll be interesting to see boat show season play out, but it appears now we’ll be slightly up over last year. To be honest, we thought the Canadian tariffs would be gone by the end of 2018, and that has not happened.”

Shifting Production

Production of Malibu boats destined for the European Union and China has shifted to its Australian plant, but the group doesn’t have that luxury for its Cobalt and Pursuit brands, Springer says.

Groupe Beneteau builds most of its European powerboats abroad, but the four U.S. brands it builds in Cadillac, Mich., make up half of its U.S. revenue, says George Armendariz, CEO of Groupe Beneteau Americas. Export volumes are “way down” — predictably to Europe — because of the 25 percent tariff, whereas the volume of European product imported to the United States has been robust.

UCINA, the Italian marine trade group, says the trade war has “frozen the export market.”

UCINA, the Italian marine trade group, says the trade war has “frozen the export market.”

“The tariffs have tempted us to make some short-term decisions, which we’re trying to resist, but that involves our American product being exported, not European product coming here,” Armendariz says. “We try to stay the course and be more strategic, or risk making the wrong decision and being purely reactionary to one market indicator.”

Companies have made strategic moves to export to or build in countries such as Brazil, but that doesn’t always pay off, Springer says. “I would be surprised if anyone said they’re looking at putting a lot of energy and focus in building up another part of world,” he says. “Brazil is a great example. People thought towboats could be a 125-boat market — they wanted to go after that — and when the economy turned with political destabilization, it turned into a market of about 30 boats a year. It’ll probably never be more than that. I would be surprised if someone said they were going to invest in another foreign market, because the return they’re going to get out of that investment, I don’t think will be that large for next 10 years.”

Balzano worries that negative trade rhetoric has frightened smaller companies that don’t have export strategies, and she recalls how crucial those sales were when the United States initially entered the global recession. To that end, the NMMA is organizing fact-finding missions to Australia and Croatia.

“I fear some are retreating from the concept of maintaining a healthy balance of exports and sales,” Balzano says. “Everyone needs to go back and look at the global crisis, and where they were then in terms of diversification.”

This article originally appeared in the February 2019 issue.

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