China Yacht Market: Rising Dragon or Paper Dragon?

Is the long-awaited explosion in yacht sales in China about to take place? There are good reasons to believe that it is, but the China yacht market is vulnerable to political forces and cultural factors shaping a very different industry from the one we know in the West. Did we underestimate the cultural differences, the attitude towards conspicuous wealth and the viable pace of transition?

Despite a slowing economy, China is generating millionaires at an extraordinary pace. In the 2013 Hurun Wealth Report, the number of super-rich Chinese (over 16 million USD) had reached nearly 65,000.  These millionaires have developed an appetite for luxury goods just as millionaires in the West, with a taste for designer labels, smart cars, private jets and art. Yachts are now on the list too: of those millionaires surveyed, 15%  said they will be shopping for a yacht in the coming year, although it remains to be seen how quickly these aspirations materialise.   

At the same time, marina development is booming, with over 100 projects either underway or pending approval, while private yachting clubs and sailing initiatives are also gaining momentum.  Global yacht builders and dealerships are expanding their presence in the country to rival local Chinese enterprises, while yacht builders Sunseeker and Ferretti were both taken over by Chinese companies last year. As Gordon Hui of Sunseeker Asia points out, local manufacturing has real potential, saying,

"If (Dalian) Wanda Group produces smaller luxury boats designed by Sunseeker in China, this would definitely take a large share of the domestic market since the pricing would be competitive without the 43.65% import tax and the products are consistent in high quality, same as the Sunseekers produced in UK, the specifications would be catered for China consumers only for domestic market just like BMW 3 Series & Audi A6."

Meanwhile, Pride Mega Yachts in China is taking advantage of the low labour costs and favourable tax conditions for Chinese yards, with contruction of the 88m Illusion underway, making it the largest yacht ever built in China.  Despite high import taxes, the Chinese still exhibit a preference for European yacht brands, such as the UK's Princess Yachts and Dutch yard Feadship, whose 2013 Blue Sky (pictured below) was the first superyacht built by a Western shipyard for a mainland Chinese buyer.

Small dayboats up to 10m are currently more popular than luxury yachts but there is no question that everyone has their eye on the yachting prize in China.

Back in 2009 the Chinese government began to actively encourage yachting tourism as part of economic policy, easing some restrictive regulations and creating the Chinese Cruise and Yacht Industry Association to represent and bolster the leisure maritime industry.  

The CCIY Association’s annual report predicted the number of leisure boats and yachts in China will snowball from a tiny 3,000 in 2012 to 100,000 in 2020, with a forecast revenue of 8.16 billion US dollars. This report led to a flurry of headlines last year, claiming the ‘Chinese Yacht Market Explodes’, but the following year sales declined.  

Despite earlier attempts to boost the yachting sector, this can be partly attributed to the government's anti-corruption drive, forbidding any government official or employee (remembering the high number of State owned enterprises in China) from indulging in ‘wasteful behaviour’. This campaign has recently been expanded, and has been so influential that China Airlines has now changed the name of ‘first class’ to ‘business class’ to fill premium seats, while hundreds of five-star hotels are appealing to be downgraded so that government employees can book their rooms on expense accounts.

Unsurprisingly, this swing against indulgence has impacted yacht purchases significantly, a trend only reinforced by reports of wild drug and prostitution parties at the 2013 Hainan Rendezvous Yacht Show.

Similar stories abound in the West, but the impact in China is quite different. Unlike most of the yachting world, where yachts are bought for leisure, travel, love of the sea, privacy, relaxation, family holidays, watersports and of course status, yachts in China are bought almost exclusively for status. They are places of business, to impress and curry favour, but if you cannot invite high-powered officials, and if officials are prohibited from buying yachts themselves, it slows things down. 

However, as Gordon Hui points out, "It has slowed down the luxury yachts sales, no doubt, but most of our customers are large legitimate listed companies or family businesses in manufacturing so I guess not really affected that much. The more difficult part is the competition against the China local shipyards because of the import duties of 43.65% which makes the foreign brands that much more expensive."

Another crucial factor in understanding the slow growth in yacht sales in China is the Chinese disinclination towards water, viewed as ‘yin’ or ‘the dark side’. Those who buy yachts tend not to want to travel long distances at sea or to sleep on board overnight.  In addition, the Chinese avoid sunlight as a tan indicates low socioeconomic status, and they don’t generally partake in water sports. Another factor is the 18,000km coastline which is not particularly beautiful and is hindered by travel restrictions between regions and in military zones. Add to this the air and water pollution that periodically plagues the country and the challenges are clear.  

Nonetheless, there are reasons to remain optimistic as the yachting industry continues to adapt to accomodate these differences in Chinese culture, most notably in the field of yacht design. In practice the aversion to sunshine can be addressed by converting or covering deck space, while cabin space can be freed up for karaoke rooms, conference spaces and mah-jong tables. The Azimut Dragon 88 (pictured) is a good example of a smaller yacht designed with these preferences in mind.

(Above: Mahjong table Azimut Dragon 88.)

Another positive factor is the exponential growth in marinas, while the government is working to ease cruising restrictions between regions. Long-range cruising is still in its infancy but there's real room for growth, as Sunseeker's Hui explains,

'If they (the Chinese) can combine the lifestyle with yachts cruising from place to place like in Europe and also enjoy the numerous golf courses along the way, a cruising holiday would be amazing. Already, we have Sunseeker owners in China doing exactly this cruising from Sanya to North, depending on the season.'

As for pollution, if you are accustomed to it, perhaps it matters less when doing business in a luxurious conference room, or playing mah-jong with the city skyline visible through the porthole. In the same way, water pollution is less of a problem if you don’t like swimming or watersports. 

(Above: Rendering of Azimut Dragon 88 main salon)

There is no reason why a superyacht cannot be used purely as a private and luxurious place to do business, moored within a mile of the CBD of Shanghai - strange as that may seem to many Westerners. This will change over time, just as peasants have become millionaires in a generation, and people that don’t know how to swim are now buying boats. Compared to their grandparents, the buying habits of a Chinese millionaire in his or her late twenties, increasingly educated in the West, are worlds apart. As former CEO of Fraser Yachts, Fabio Ermetto, said in an interview with Bloomberg, "There's a feeling that in the next couple of years we'll get more and more clients who have never owned any kind of boat before and will invest in a new superyacht".

With small boat usage already on the rise, the entry of China’s Team Dongfeng in the Volvo Ocean Race, and exclusive yacht clubs springing up all over the country, there is a real possibility that the Chinese will increasingly enjoy being on the water - the sense of enjoyment and freedom it brings, the sport, as well as the sense of exclusivity. 

(Above: rendering of the main salon of 88m Illusion, Pride Mega Yachts China.)

So where will the market be in 10 years? 

Paul Grange, Sales Director for Simpson Marine, Official Azimut Yachts dealer in Asia, is positive over the longer term, saying, "The market has certainly stalled and I think there will be modest growth over the next five years. If China make it easier and more attractive to buy yachts and the tax and investigation aspects can be moderated over time then I estimate the market will be double or triple what it currently is in 5-10 years. That said, the competition is growing all the time, so market share will be hard to get or maintain and this will have an effect on individual companies’ sales. Also, the quality and style of locally produced boats will continue to improve, which will also play a part in the market share."

(Pictured: External view of Azimut Dragon 66)

The most exciting thing about the market in China right now is the level of investment in facilities and the purchase of Ferretti, Sunseeker and San Lorenzo by Chinese companies. Paul Grange points out that, "Clearly the most knowledgeable, most connected and richest business men in China are convinced that the market will grow and are prepared to invest considerably at this stage to be involved. I also see large yacht sales and superyacht sales as a growth market in China for the future."

The financial risks in China are high but the potential gains are astronomical. To succeed in the way the yachting industry hopes will require time and government support in regulation and taxation matters, as well as active encouragement for leisure and tourism. Nobody, not even the Chinese, know what the future of yachting in China looks like, with Hui admitting, "I am not sure how to assess the future China market at this moment." One thing is sure: the superyacht industry of the Orient will be unlike the one we know now.  

*Images courtesy of Feadship, Hainan Rendezvous, Azimut Benetti, Fraser Yachts