Staying Afloat in the World of Megayachts

They're over 100 feet long, cost more than $10 million and are the embodiment of luxurious excess. But building megayachts for the mega-rich is anything but a glamorous business, as local industry survivors will attest.

They’re over 100 feet long, cost more than $10 million and are the embodiment of luxurious excess. But building megayachts for the mega-rich is anything but a glamorous business, as local industry survivors will attest.

Inside the cavernous Richmond Yachts plant off Dyke Road, the smell of fibreglass permeates the air. Along half its width is an unfinished 142-foot yacht, whose sleek superstructure reaches to the ceiling. It is surrounded by a maze of scaffolding. Fibreglass workers, electricians, plumbers and other tradespeople go purposefully about their work. The sounds of grinders, drills and hammers fill the plant. Along the other side of the building, workers are dwarfed by the hollow shell of another 146-footer as they lay in stringers. Richmond Yachts’ VP of operations Keith Kiselback tours up and down the multiple decks of the unfinished yacht and through the various shops. Tall and slim with greying hair, a neatly trimmed beard and rosy cheeks, he is dressed casually in a shirt, sweater, jeans and a fleece jacket. Surveying his workers, he likes what he sees. Kiselback’s confidence is, in part, the product of spending a lifetime building yachts. He’s helped build 50 megayachts – vessels more than 90 feet long. He’s survived the vagaries of B.C.’s volatile megayacht-building industry and been involved in the rise and fall of several of its biggest players. His father drove freighters, his daughter is a ship’s captain and his wife’s family can be traced back to explorer John Cabot. “I stay in the business because this is what I’ve grown up to love and what I want to do,” he says. At the turn of the millennium, according to the B.C. Yacht Building Association, yacht building in the province was a $250-million industry, with six to eight mega-yachts of more than 100 feet being built each year by a direct workforce of 1,500. By 2005 most of those companies had shut down, sold or restructured, and their skilled workers had moved on to more reliable jobs in other construction industries. Today the industry that was once booming is producing less than $75-­million worth of yachts, and its workforce numbers less than 500. What happened? Few foresaw a downturn during the industry’s heady years. A booming North American economy drove the industry to great heights throughout the 1990s. Toward the end of the decade, dot-com entrepreneurs and investors were suddenly finding themselves with millions of dollars in their jeans. The wealthy were getting wealthier and looking for ways to spend their money. They responded by throwing their cash at larger and fancier yachts. American yards, including those in Washington State, began to find themselves with full order books and many were booked solid, unable to even consider taking on new projects for two or three years. B.C. had always been known for having good yards, a good workforce and for building high-quality boats, so customers began flooding across the border. A favourable U.S./Canada exchange rate didn’t hurt matters, either. Through the 1990s, the greenback was worth 30 to 48 percent more than the loonie, giving B.C. yards a significant advantage over U.S. yards. The trend continued beyond 2000 and peaked in 2002 with the U.S. dollar worth $1.57 in Canada. B.C. yards were scrambling to keep up with demand, but business was great. “People were coming in every week looking to have boats built. Everything was going well. We had a crew of up to 120 and we were making quite good money,” recalls Kiselback, who at the time was running Sovereign Yachts Canada Inc., a Richmond-based company set up by New Zealander Bill Lloyd in the mid-1990s. In the late-’90s and early-2000s, the company built close to a dozen megayachts from 90 to 138 feet. There was plenty of wealth to go around. Ben Vermeulen founded West Bay SonShip Yacht Builders Ltd. in 1967 to build small commercial vessels in Delta. Thirty years later, he and his sons Wes and Bas were building 14 to 16 yachts a year (of up to 107 feet) and employed a workforce of 200. Dan Fritz bought Maple Ridge-based yacht builder Cooper Yachts from Forbes Cooper in 1989 and began churning out mega-yachts under the brand name Queenship YachtWorks Inc. Jack Charles of Arrow Transportation Systems Inc. started Crescent Custom Yachts at Crescent Beach in 1987, initially to finish bare hulls of about 120 feet he’d bought from the U.S. He was building one or two each year and was so successful that he built most of his yachts on spec, only offering them for sale when they were finished or close to being completed. [pagebreak]

mega yachts

Jim Hawkins, another veteran builder who started with the venerable McQueen’s Boatworks in the early 1980s, went to work for Crescent, travelling all over North America interacting with clients and brokers in the company’s heyday. “We got on a really good run,” he remembers. “When the Canadian dollar started to slide and broke that 80-cent barrier heading down, it was physically impossible for us to keep building at Crescent Beach.” As business boomed and supply couldn’t keep up with demand, most of the existing companies expanded. Crescent went on to build a 45,000-square-foot facility on Mitchell Island. Queenship increased its facilities by 300 per cent when it built a new 64,000-square-foot shop in Maple Ridge. Sovereign built a 75,000-square-foot facility in Rich­mond. West Bay SonShip also expanded to significantly larger premises in Delta. In 1997, the Knowledge Network profiled the B.C. yacht-building industry in a video titled B.C. Yachts and Yards. Every builder interviewed predicted a continued bright future for the industry. But there were dark clouds on the horizon. In the early 2000s, the B.C. megayacht industry faced its most serious challenges. Suddenly the order books were getting thin, due in part to economic caution that followed the dot-com collapse in 2000 and then the September 11, 2001, terrorist attacks. Then, just when things were starting to get rolling again, the Canadian dollar started to climb. There was an 11 per cent increase in the value of the Canadian dollar between 2002 and 2003. This came on top of capital costs that optimistic builders, who had invested heavily in new facilities, were carrying. Profit margins in this niche market generally run between 10 and 15 per cent – extremely tight, even when times are good. In fact, builders often complain that the yacht broker’s commission is about the same as the builder’s profit, yet the brokers don’t have to carry any of the financial risks. There are many things that can upset that margin: a company may underbid just to keep yachts flowing through the yard, material costs can change significantly during the lengthy build period, or a buyer may back out due to financial or legal problems. While contracts are typically set up on a fixed-price, cost-plus or some other creative financing method, a few companies prefer to work on spec and then cash in when the boat is sold on completion.

luxury yachts

Crescent Custom Yachts employed this strategy. Ideally, the buyer appeared right after the boat was finished, which gave the company the opportunity to include a fair profit margin in the final selling price. This also worked well for many customers who were able to purchase megayachts immediately – on impulse, in many cases – instead of having to wait several years for their boat to be built (although they’d have to pay a sizeable premium). Hawkins explains, “They would just walk on-board and go, ‘When can I get a boat like this?’ We’d say, ‘You can have this one. Just cut us a cheque.’” Hawkins reports that by building on spec, Crescent could increase its premium by $1 million on a $7-million to $8-million yacht. Of course if the boat ­doesn’t sell, the builder can get drowned. It takes somewhere between 18 months and three years to complete these floating mansions. Whether the yacht is being built on spec or to some form of contract, the builders have to be able to account for potential changes in the cost of materials over that period and balance their books. If they’re not careful, the potential profit on a $10-million to $25-million (US) 130-foot megayacht can quickly turn into a loss. With all these factors at play at the turn of the millenium, the B.C. megayacht industry found itself in tatters. All the four major builders in the early 2000s – Sovereign, Queenship, Crescent and West Bay – either saw a shut-down or sought protection from creditors, followed by a change of ownership. At Sovereign Yachts, the industry-wide slowdown couldn’t have come at a worse time. The company had just expanded to a new plant in Richmond and was in the midst of constructing a second Sovereign plant in New Zealand. “I think that when the dot-com thing happened and business quieted down, [owner Bill Lloyd] ran out of funds, and his solution was to just to leave this behind. He and his sons just left,” recalls Kiselback, who had left Crescent and helped set up Sovereign. He still vividly remembers that day. “When the principals vanished, I was just standing there in the parking lot with everybody looking at me like, what do we do now? My approach was, I’m just going to weather it out until the very last minute.” [pagebreak] Don Davis, a Fort Lauderdale restaurateur, had a partially finished megayacht underway at Sovereign when it closed. An experienced yachtsman, he decided to acquire Sovereign’s assets and changed the company name to Richmond Yachts. He hired Kiselback as VP of operations. Recalls Kiselback, “I sat here by myself for about a month, and then away we went. There was a slightly started hull in the mould, but there was nothing else here.” Richmond has since built three mega-yachts in the 140-foot range. All have received considerable media attention due to their striking lines and high quality of construction. Two 146-footers are currently under construction and due for launching in 2008. Richmond is now the busiest mega-yacht yard in B.C. and employs 140. Queenship was also given a new lease on life. It went into receivership in 2002, and in 2003 it was acquired by WorldSpan Marine, a Florida-based conglomerate involved in a number of marine businesses. The doors reopened in late 2004, and in 2005 WorldSpan also acquired the idle Crescent Custom Yachts brand to continue building larger yachts. As of early 2008, Queenship/Crescent was finishing two 70-footers, with plans to re-enter the megayacht business with a 142-footer. WorldSpan Marine has also leased the Queenship brand name to former Queen­ship owner Dan Fritz and a group of Hong Kong investors who plan to produce a line of Queenship-branded yachts in China. After seeking protection from its creditors in 2006, West Bay SonShip reorganized. It completed a 54-footer in the fall of 2007 and has no new orders on the books. Rayburn Custom Yachts, which emerged as a megayacht builder in the mid-2000s, is another company that had to stretch to survive and has since earned a reputation as a high-quality builder. “We survived by being lean, not having big overhead costs and by really working our butts off,” explains co-owner Paul Rayburn. “There are no Mercedes parked out front, and we’ve painted the offices only once in 15 years. We’ve earned a reputation in the industry for being good people to do business with, for being fair and for not taking the easy way out when things get a little tough.” So how murky is the future of the mega-yacht industry? Despite the changing face of B.C.’s megayacht builders, the business for yachts greater than 100 feet remains strong worldwide, with the greatest demand for yachts of 150 feet or more. According to Credit Suisse Group’s Steven Rattner, quoted in the Yacht Report’s 2007-08 annual summary of the global megayacht business, there are 90,000 families in the world with a net worth of more than $360 million, and that number is expected to increase by 10 per cent a year. This means each year there should be about 9,000 new families that can technically afford to spend $36 million on a yacht. Currently there are approximately 450 yachts of more than 120 feet under construction around the world, so clearly the market for megayachts exists. Competition from Washington State and the rest of North America, as well as Europe, certainly has an influence on B.C.’s future as a producer of megayachts. American, New Zealand and European builders are currently playing on a fairly level playing field. Their wages, costs of living and costs of doing business are more or less comparable. But Asian builders, primarily in China and Taiwan, have a distinct advantage in their lower wages. Longtime builder Forbes Cooper, whose Cooper Yachts sold to Dan Fritz in 1989 and whose FC Yachts sold to Ron Rayburn in 1998, is not optimistic. He sees no way around the Asian advantage. “When you’re paying [workers’] compensation and other things, you’ve got a cost of labour of $30 to $34 [an hour], versus a guy making $8 a day in China. What do you do? You can’t beat it,” he says.

“It’s very hard for North American builders, including Canadian builders, to be able to compete [with China’s production yachts], because sales of boats under 80 feet are very much driven by price point,” agrees Queenship/Crescent’s Jim Hawkins. But, he notes, “China is very much ‘put Tab A into Slot B.’ Custom-build projects [which most megayachts are] require a tremendous amount of supervision and oversight.” This means, at least for now, that countries with more established megayacht-building industries still have an advantage. How long that advantage will last is up for debate. As Richmond Yacht’s Kiselback puts it, “Megayacht building is the same as farming in many ways. The small players are going to be owned by large players, and in the future there will be less room for the small players to fit in.” The inherent problem with the small builders is security for the client. “A lot of people are worried, and rightly so,” explains Kiselback, “because a lot of boat builders have gone under. People are worried that they’ll get halfway through a project and the guy will go under, or the guy will go under just after the boat is finished and there’ll be no war­ranty recourse. “It’ll be the people with real deep pockets and the people who’ve been there a long time who get through it all. Today there’s less and less chance of the new players making it.” However, to B.C.’s advantage, most of the existing builders are utilizing well-respected B.C. brands that have been on the world scene for 20 or more years. The names are stable, if not the financial history. Regardless of the challenges facing the industry, there’s a deep reason that keeps people such as Hawkins and Kiselback in the business. Says Hawkins, “To be in this industry, you’ve got to have a passion for it. The owners of these companies are passionate about boats and looking for clientele who are also passionate about boats.” Kiselback agrees: “Once boat building gets into your blood, chances are you’ll never get it out – never shake yourself free. Our work is prototype and custom throughout. Being a megayacht builder isn’t like being a plumber where you go into a highrise and install 50 kitchens all exactly the same. “I’m here for the challenge of boat building and the beauty of producing a high-end finished product,” he concludes. “Boats and the marine world are my life.”