O.C. Boating Industry Back on Even Keel : Recovery: With the repeal last summer of a federal luxury tax, manufacturers and retailers are experiencing a rebound in sales.
Orange County’s boating industry--nearly swamped by a federalluxury tax enacted in 1992--has been riding a wave of new sales and employment since the repeal of the levy last summer.
Buoyed by optimism rising from the August, 1993, repeal of the so-called luxury tax, retailers say that rather than too many boats and too few customers, they’ve now got a flood of customers and a shortage of watercraft to sell.
If the trend holds, retailers and manufacturers say, the boat business should return to its former profitability by 1999.
The industry had been foundering since 1990, when then-President George Bush approved the 10% luxury sales tax on new boats costing more than $100,000.
Though the tax itself was effective only from January, 1992, through August, 1993, its passage in 1990 caused so much confusion and concern--in the business and among potential buyers--that sales began falling almost immediately, industry members said. Nationally, sales dropped by $10.6 million to $176.2 million in 1992, the National Marine Manufacturers Assn. reported. Sales figures for 1993 are not yet available.
The tax triggered massive layoffs and plant closings by boat builders and sellers nationwide.
Orange County, for instance, lost a quarter of its boat builders. There are now 12, down from 16. Most of the survivors specialize in high-performance ski and racing boats that sell for less than $100,000 and were not affected by the tax. Retailers’ suffering was worse--there were 80 boat stores in the county before the luxury tax, and today there are 45, said Terry Tjaden, show manager for the Orange-based Southern California Marine Assn.
The plant closures and layoffs eventually cost the government more in jobless benefits than it made from the tax, said Tjaden, whose trade group represents about 600 members.
The sales slump hit hard in Orange County, where boats are big business. County residents own more than 69,000 recreational powerboats and sailboats--the second-largest concentration in California, according to state and federal registration figures. Los Angeles County, with 121,000, has the state’s largest boating populace.
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Now, Tjaden said, “the word is that things are a lot better.” He estimates that business in Orange County is half of its pre-luxury-tax volume.
Southern California’s lingering economic problems will probably continue to depress boat sales in the county, but industry officials expect 15% sales growth nationally for 1994.
Even if sales only edge up a fraction of that amount in Orange County, it will be an improvement, boat brokers say.
At Lemest Yacht Sales in Dana Point, where the lowest-priced new boat sells for $290,000, customers were quick to protest the 1992 levy. “We lost six orders” immediately after it took effect, said owner Joseph Meglen.
He said that his company sold an average of 45 boats a year before the luxury tax and considered it a bad year when the tally fell to 36. “We didn’t know how bad bad could get,” he said.
In the 20 months of the tax, the store sold just four new boats--all of them to foreign customers who were exempted from the levy.
Lemest’s manufacturing plant in Taiwan shrunk to 60 employees from 300. The retail brokerage cut its staff to five from 14.
But it is difficult to separate boat lovers from their dreams. Meglen’s clients were just as quick to respond positively to the repeal of the tax, he said. “We started selling boats and taking orders immediately,” he said.
In the past 12 months, Lemest has sold 16 boats worth a total of $8.4 million, at prices ranging from $300,000 to $1.5 million. The customer who bought the $1.5-million yacht had been eyeing it for four years but had vowed that “he would never pay that tax, ever,” Meglen said. On that boat, the 10% luxury tax on the price above $100,000 would have totaled $140,000.
But four days after Congress repealed the tax on luxury boats, the customer signed a purchase contract.
Other prospective boat buyers felt the same way about the levy and put their plans on hold for the duration, boat sellers say.
Jeff May, a boat broker at Crow’s Nest Shipyard and Boat Brokerage in Newport Beach, said that sales rebounded abruptly last month, when he was deluged with orders for boats. “In the past five weeks, I’ve sold more than $2.1 million in Tiaras,” a line of yachts priced from $111,000 to $500,000, May said. During the same period a year ago, he didn’t sell any new boats, he said.
Meglen said that the decline in sales of new boats trickled down to other manufacturers and retailers. “There’s a lot of spinoff business from what we do, because I buy one-third of my engines, gel coats, fiberglass and pumps here” in Orange County, he said.
Now that the tax is gone, the boat industry faces a new set of problems: Manufacturers have been overwhelmed by renewed demand. The backlog on the most popular new Tiaras was just a month or two in the days of the luxury levy, May said. Now it’s five months, and on some of the larger boats, the wait for delivery can stretch out to 1997.
That is happening because manufacturers had to scale down operations or close their doors when few customers were buying, so their plants sat nearly idle. Because few new yachts were built, all of the good used vessels have been sold, May said.
Now boat builders are trying to find suppliers to replace those that have gone out of business and skilled workers to replace those they laid off years ago, and in the meantime, production can’t keep up with the growing demand.
Crow’s Nest has become so busy that the shop recently decided to hire a receptionist and a boat cleaner--positions that were cut during the slowdown.
Retailers and manufacturers aren’t the only ones playing catch-up.
May said that, in order to survive over the past few years, he leveraged himself, using credit cards and a home-equity loan. “You get very creative in financing yourself,” he said.
He said he also shored up his dwindling commissions with income from a small marketing business he operates on the side. In the past, the marketing business generated 25% of his income, but last year, it accounted for 75%, he said. “I really clamped down and started doing it and making money,” he said.
Now that things have started to pick up, May said, he expects to be debt-free again by 1995.
He said he figures business will continue growing for about five years, until the pent-up demand is satisfied. That, he said, is when he’ll probably get out of the industry. “We are going great guns . . . but it is very cyclical,” May said.
Tjaden, the marine industry association spokesman, agrees that full recovery is still years away.
While Orange County is halfway there, Tjaden said, “the luxury tax is just one piece of the pie.” The rest of the recovery hinges on three key factors: an improved economy in Southern California, people feeling secure in their jobs, and the absence of further tax increases.
