Lead Line — January 2004
By Richard Thiel
|Building yachts, while glamorous, is one of the riskiest ventures extant.|
Can you imagine a better way to get rich than by building yachts? Think about it: You rub elbows with some of the world’s richest and most famous people, building what are arguably the most glamorous and exotic consumer goods ever conceived by man. Yachts built by you appear in films and magazines all over the world, and a good portion of the planet would die to spend only a few minutes aboard one of your creations. And best of all, you’re manufacturing goods valued in the millions of dollars. Imagine the markup!
Unfortunately the reality of the business is not quite as seductive. In truth, building yachts, while glamorous, is one of the riskiest ventures extant. In fact, not a year passes during which a couple of yacht builders don’t go out of business, slip into bankruptcy, or fall on hard financial times and have to sell out. How can this be? How can one possibly not make a ton of money building such an expensive commodity?
There are a number of reasons, none of which involves a lack of customers. First, yacht builders deal with people who are, by definition, the world’s most successful capitalists. These people have reached the pinnacle of success by squeezing every penny out of every transaction, and they have legions of lawyers and accountants to help them. They can be very tough to deal with.
They’re used to getting exactly what they want. Hence, when they contract for a yacht, often they decide partway through construction that they’ve changed their minds about a few things. These “change orders” can entail everything from picking new wallpaper to adding 20 feet of LOA. The builder and owner typically negotiate the cost of modifications and add it to the bill. But too often the builder underestimates these costs and loses money on the change. A typical project might involve tens or even hundreds of change orders, so it doesn’t take long for a profit to become a loss.
This is compounded by the fact that some builders are superb at building boats and lousy at keeping books. Building a yacht is an amazingly complex undertaking, and absent careful cost management and monitoring, builders are often shocked to learn that the contract price has been reached yet the yacht’s not done. Here the builder is at the owner’s mercy. Some owners will renegotiate, but some play hardball, meaning the builder must complete the project out of its own pocket.
A builder is further constrained by the fact that building a yacht ties up vast resources—maybe all of the resources—so it can’t just work on another project while sorting out a disagreement with a disgruntled owner. Often the yard must complete the yacht so it can start another one on time, lest it be penalized by that owner for late delivery. Likewise, the builder must have a follow-on project to pay the overhead, which, of course, includes salaries. If it can’t, its skilled crew may be hired by other yards, leaving the builder without the manpower necessary if another project comes along.
Admittedly, there are many yacht builders that have enjoyed relatively uninterrupted success over the years, and that success partly explains why each year successful entrepreneurs become enamored with the thought of building yachts (“It’s just another business! How hard can it be?”), often with dire consequences. So if you’re thinking of building yachts for a living, my advice is to keep your day job.
This article originally appeared in the December 2003 issue of Power & Motoryacht magazine.