Jet Tern Marine succeeds going where other yacht manufacturers have not gone. Having established itself as the largest builder of yachts in China, Jet-Tern is poised to challenge Taiwanese builders. Its biggest challenge is to continue to attend to efficiency and craftsmanship.
In the Yacht Industrial District, Pingsha Town, Zhu Hai, a 59’ Selene trawler is ready to be launched. She will be shipped in a week to Seattle, Washington to Mr. Steven J. Hazlerig, who was the senior manager at Mircosoft as well as Chief Designer of Excel, in about one week. Besides Mr. Hezlerig, there are many other high-achievement customers who have placed order to this shipyard named Jet-Tern Marine Co. Ltd.
Many of Jet-Tern’s customers are well-known - Dick Johnson, former Engineering Director of Boeing Aircraft; Dave Olsen, Senior Vice President of Starbucks, and Michael Snodgrass, the CEO of Brilliance Audio which is the largest audio book company in US.
Today, Jet-Tern Marine is the largest yacht shipyard in China. Since founding in 1998, over 200 Selene Ocean Trawlers have been delivered. Just in 2007, 48 boats have been delivered and are valued at about NTD$1.1 billion. Jet Tern’s turnover is approaching the NTD$1.6 billion generated by Kha-Shing Yachts, the largest shipyard in Taiwan. This is impressive considering that Kha-Shing Yachts has a 30-year-history while Jet-Tern has but 8.
How did Jet-Tern grow so quickly and become the largest shipyard in China, generating a turnover approaching that of Kha-Shing Yachts? Howard Chen, CEO of Jet-Tern attributes it to seeing there was a way to make yachts in a way other competitors could not. As the market shifted, Taiwanese shipyards were forced into such stiff competition that margins were reduced to nearly zero. They had had to change their market.
An Opportunity for Jet Tern
In the 1980’s, Taiwan was called the “Yacht Kingdom”, but there was a major decline in the 1990’s. In just 10 years, the number of yacht manufacturers in Taiwan slipped from over 100 to less than 40. Rapidly increasing salaries and escalating land cost forced more than 60 shipyards closed down. At the same time, Taiwanese yacht manufacturers began building the expensive luxury megayachts, leaving the middle market vulnerable.
That created a window of opportunity for Jet-Tern. Chen says, "The market for smaller-sized yachts used to be the foundation of Taiwan's boat industry. However, most of the boat manufacturers gave up owing to the increasing costs they could not shed. Founded in 1998, Jet-Tern was able to expand quickly while most competitors were struggling with economic pressures of their own making."
In the view of older, more established manufacturers, the small yacht market had lost its appeal. So why did Jet Tern decide to enter it? It was because Jet-Tern knew that applying its own strengths and focusing efficiency on the smaller size American style yacht market it could succeed while others scrambled to enter the emerging European style large yacht market.
The biggest difference between the European style and American style yacht is that the cost for the former is extremely high – usually more than NTD$50 millions. It seems that one purpose of the European style yacht is to show the richness and luxury. They are mostly used for holding parties by the “rich and famous.” In view of this, the European style yacht is commonly has two features. First, the cruising speed must be fast enough, so the high-powered engines are required. Second, they require a luxurious and workmanlike interior joinery which requires experienced carpenters. The salary for a carpenter at Kha-Shing Yachts, the biggest manufacturer of European style yacht in Taiwan, is over NTD$100,000 per month, even more than the general manager.
Preempt entering into China Mainland, defeat the competitors by the lower labor cost
As to the American style yacht, the main requirement is to be like a second home. Thus, it is not so necessary to install high-powered engines on the boat, and the interior joinery is more suited to family life. The cost to build an American style yacht is half the cost of building an European style yacht at the same spec. Due to the market requirements of the two kinds of yachts, the cost structure is different. Most of the difference is the labor cost. The European style yacht emphasizes luxury, high speed, and elaborate expensive equipment. So even though the payroll for some individual technicians is very high, the labor cost of these large luxury yachts account for only 10% of cost In contrast, labor comprises about 20% the cost of trawlers and other American style yacht.
Considering the market and labor realities, Jet-Tern decided to set up factory in China and was the first ship builder from Taiwan to do so. By doing so, Jet-Tern could overcome the disadvantages of the higher percentage of labor cost that American style yacht requires and avoid the increasing land and labor cost in Taiwan.
Given Taiwan’s increasing land and labor cost in the 1990’s, it was not too difficult to make decision to head for China. So why could Jet-Tern be a pioneer? Besides the shipyard itself, a supply chain of satellite companies must be available to provide parts and materials. When Taiwan’s yacht industry declined, the satellite factories supporting the yacht industry sought and found other business and no longer regarded the shipyards as their main customers. As Taiwanese shipbuilders began thinking about setting up factories in China, they elected not to in view of the incomplete supply chain. This gave Jet-Tern an opportunity to establish itself and grow rapidly with little competition.
How did Jet-Tern get the opportunities to grow up and expand so fast?
To obtain the economies of scale, modular production cuts construction time in half
Chen pointed out that, to get more profit in a time of low margins, it was essential to realize economies of scale. This demands high production efficiency. This is logically quite different from other Taiwanese shipbuilders philosophy.
Take for example, Kha-Shing Yacht, the biggest shipyard in Taiwan. Now most of its yachts are luxury yachts, usually over 100 feet in length. Their market price is often more than NTD$160 millions. Because of the emphasis on luxury, construction requires a lot of work and takes at least a year to complete.
With a totally different production model, Jet-Tern Marine produced 48 yachts by the end of the 3rd quarter of 2007, and generated revenue of nearly NT$ 1.1 billions. The average selling price was NT$ 23 millions for each yacht. Although the unit price is only 1/7 of the price of a luxury yacht such as the major product of Kha-Shing Yacht, JTM only takes six months to build most yachts. At any one time nearly 30 yachts are on production line at the same time.
In addition to focusing on superior craftsmanship, Chen emphasizes efficiency. Although that is the entirely different logic from production, it had led a new way for JTM to succeed. Howard pointed out that JTM is a newcomer to yacht industry, although he has years of experience in marine engineering and shipbuilding in Taiwan. This gave JTM an advantage in being able to start from scratch, having learned many lessons from Taiwanese yacht builders.
JTM needed more efficiency in production to get ahead of the competition. The key to higher production efficiency is to adjust the production process by using the modular production. In general, the Taiwan yacht production process is to build the hull first, then to build out the interior. Modifications are made to make yachts customized to what customer asks for.
Instead, JTM makes all the things at the same time by dividing the workers into two groups, one is in charge of making hulls, while the other is responsible for the interior. It can save half of the manufacturing time.
Mr. Chen, the Associate Professor of Kaohsiung Institute Technology College, pointed out that the shipyards in Italy divide the yacht interior into many independent units and the different groups of workers only participate in their own portion. Then all the independent units are assembled inside the cabin. It’s kind of a very high-tech skill and makes Italy one of the premier yacht building countries in the world.
Investment in the high-tech equipment guarantees reduction in errors
Precision is the key to success of modular production. Even a tiny difference for each module will prevent precise assembly. In the beginning, when Chen studied the reqirements for modular production, he ran into many difficulties that really made him stand back. After exterior processing was completed, for example, the workers failed to assemble all of the modules due to some very tiny differences. That often required removing all of them to rework over and over. "The most we ever had to remove and reassemble them was three times. It not only increased the production cost, but also seriously delayed the delivery schedule." Chen said.
Sometimes this created a conflict between the teams of JTM. Some experts of carpentry blamed it on the design department while the design department thought that was due to carpenters not building to their design specification. To deal with this, Chen invested three years to integrate team members to overcome these issues. In that time, JTM only built 28 boats. This difficult implementation eventually required that the materials of 20 yachts to be scraped because of a very tiny defect.
Finally, Chen discovered that the only way to settle down this problem was to invest.
From the appearance of Dong-Guan shipyard, it looks more like an electrical high-tech control center than only a boat factory. The investment surpasses NTD$30 million for computer equipment including CNC machines, servers and software systems. This is said to the biggest investment of the sort in a shipyard in China. Howard also hired a former IBM executive to implement new systems to help increase the productivity.
Provide customized service to give each yacht its own personality
JTM’s willingness to customize Selenes really impresses buyers. It enables each owner to make changes to meet their individual needs. To achieve the objective, JTM divides the yacht into many pieces just like a magic block,
For example, they divide a 70-foot yacht into over 800 layout components for the interior. Because of its unique character, JTM gives its customers flexible options to make their dreams come true. Other yacht companies usually provide only one kind of wood to build, bit JTM offers a variety of materials to meet the customer's requirements. So it is not unusual to find 5 different staterooms using by 5 different kind of woods, presenting a different color and style in each Selene yacht.
To reach the scale, "The standard specification and the customized option are like both ends of a balance. With the help of high-tech systems and equipment, JTM is extremely competitive in providing quality yachts, customized service to buyers, and operating at high levels of efficiency with the associated lower costs in China" said Howard Chen.
However, Chen also recognizes that there is still a gap in the skill of the workers at JTM compared with the yacht competitors in Taiwan. That’s no wonder, facing the strong competition in yacht market, Lu Jia Yang, CEO of Horizon Yachts Shipyard told with confidence: "In the short-term, China still was not the threat, the space for Taiwan yacht industry is still big."
A pioneering shipyard in China, JTM, which is owned and managed by Taiwanese, took the lead to take the advantages of being the first mover, while the other Taiwan competitors were still finding the way out.
JTM is really successful in China now, yet the inevitable competition between JTM and Taiwan yacht manufacturers will come face to face in the near futures.
* The profile of JTM:
Found in 1998
CEO: Howard Chen
Major Product: Trawler
Current Position: The biggest shipyard in China
Finance Status: 48 boats through Third Quarter 2007 with the revenue approximately NTD$ 1.1 billion.