Inside GE, Part Two
Boating Industry: The issues facing our marine businesses are plenty. There’s much less floor traffic than ever before; dealers aren’t selling as many boats; in response, they also aren’t ordering as many boats; and therefore, the builders are halting production and struggling, like the dealers, to make ends meet. What do you think is the root cause of all these struggles?
Bruce Van Wagoner: I think the marine industry you described parallels many industries in the United States today. It’s what I mean when I say the economy is in a fundamental “reset.” That’s why we think the industry will be smaller, but stronger overall, when the economy recovers.
I’m certainly not an economist, and I don’t think you can pick one thing that is the root cause of all our struggles. When people talk of a “perfect storm,” they’re referring to multiple events that, together, combine to create something unprecedented. If you think about it, we have had a perfect economic storm – many banks and financial institutions taking highly leveraged and risky positions; overly aggressive consumer lending; less oversight and regulation of the institutions that were lending these funds; and an unprecedented decline in real estate values have all contributed to the inventory and liquidity issues we are faced with today.
Boating Industry: There has been a lot of talk around the marine industry about a need for additional floor plan sources. Our industry associations have been pushing for inclusion in the TALF and SBA loan program. Some dealers we’ve recently visited have suggested that because of the expense of floorplan financing, they haven’t been able to buy new inventory to satisfy the limited demand they are experiencing. Do you believe the industry needs more sources of floorplan financing, and if so, what can be done to attract them?
Bruce Van Wagoner: We think that for any healthy industry, businesses should have choices. We certainly can’t fund an entire industry ourselves. We think the SBA program or any other programs have potential for the industry if they can understand the needs and risks involved in floor planning.
We have had candid discussions with many of our customers, and the availability of wholesale financing has not been the primary issue dealers and manufacturers are wrestling with. It’s the lack of consumer demand and the challenges consumers have securing loans. That’s what keeps many of our customers awake at night. Generating consumer demand to clear out the inventory overhang in the field today is their main challenge, and the best way to manage through this cycle.
In terms of financing costs, it is true the worldwide capital market volatility has certainly elevated the cost of borrowing for most companies. However, in relative terms, overall floorplan financing costs to the dealer base are not much different, rate wise, than they were during the industry boom days of 2006 and 2007.
Boating Industry: How much of this is a need for the marine industry to learn a new way of operating our businesses? And what’s the lesson that you think we should take away from this?
Bruce Van Wagoner: This cycle has differed from other cycles in its level of severity, which has impacted many dealer and manufacturer fall back positions. In prior downturns, many businesses were able to rely on real estate as a mechanism to generate needed liquidity. Since real estate values in this cycle have been eroded, there just isn’t enough equity in the properties to use this once reliable source as a continued fall back position. This highlights the importance for dealers of arranging alternate sources of liquidity in good times to weather future down-cycles.
One thing I think that everyone should take away from our situation today is the importance of managing inventory and cash flow very carefully. That’s the way businesses can stay strong during down cycles. We work very hard to help educate our customers on the best way to manage their businesses from an inventory finance perspective.
Boating Industry: We have heard many predictions about when an economic recovery might occur. Some economists suggest the recovery may have already begun, but all indications suggest that the boating industry may take significantly longer to recover than the economy at large due to the time it’ll take to get rid of aging inventory in the field. What is your outlook for the marine industry?
Bruce Van Wagoner: We remain cautious, but optimistic. I think that it may take awhile before we feel the effects of a rebound. There is probably a “ripple effect” that happens – we hear encouraging economic news, but don’t always feel the results right away. I really think the industry we will see in the future will be smaller but stronger, with innovative new ideas and products that will help get consumers back into the dealerships and marinas. Once we start to see inventory turns and distressed inventory levels stabilize in the market, that will suggest the recovery is underway. We are not there yet.
Boating Industry: What factors do you believe will most affect the timing of the boating industry’s recovery and its overall future health?
Bruce Van Wagoner: As I mentioned earlier, the four biggest things that will impact the marine industry are customer behavior, consumer demand, the availability and cost of funds, and government regulation. These things all relate to risk and everyone’s ability to manage it. Manufacturers and dealers will be likely operating in a more focused and cautious manner, which I think is good. Consumer demand will be driven by the overall economic picture, and also by their perception of economic stability – that they won’t lose their jobs or be out of work for a long time.
Boating Industry: I read a BusinessWeek article recently that suggested the bankruptcy of a large chunk of the automotive dealer body would ultimately benefit the industry. As in the auto industry, however, it isn’t only the dealers’ businesses that are at risk of going under. As painful as it is, do you think the marine industry will be better off if the vast majority of sales are spread amongst fewer, more professional boat builders, aftermarket suppliers and dealers?
Bruce Van Wagoner: The question really comes down to how many businesses the marine industry can support, given the level of anticipated demand going forward. Every industry sees companies come and go year after year, but there is always a level or size where an industry balances out. If it grows too big meeting a short-term demand, it will shrink again as demand declines – both in terms of dollar size and number of workers. I think it’s more about understanding what the “right” size of the industry is to meet the demand for manufacturers, suppliers and dealers. I don’t expect that credit standards will spark an explosion of new activity.
A lot of this is really about the consumer. Tomorrow’s consumers will likely be more cautious with their money and what they will spend it on. Product differentiation and value will become increasingly important. Those that can provide value with the product they make or the service they provide will grow stronger, those that cannot meet those objectives will ultimately fail. I think we are seeing some of this in the marine market today.
Boating Industry: When the industry rebounds, what’s to stop an influx of new boat builders and dealerships from entering the business?
Bruce Van Wagoner: Competition is good. It keeps everyone sharp and it usually allows for the best ideas or products to win out based on the consumers’ choice. As I said before, it will be important to understand the size of the industry going forward, and new players will need capital to fund investment. But if new builders and dealerships enter the business, that will be a healthy competition, which will drive innovation. This helps the industry evolve.
If you would like to read the first installment of this report, click here.
If you would like to read the third installment of this report, click here.
If you would like to read the fourth installment of this report, click here.
