My colleague Stephen Metzger has penned an article on the trend towards urban mobility. The big question he asks is whether the small, task-oriented vehicle industry will take advantage of this opportunity. As the golf car manufacturers have focused more on personal transportation vehicles (PTVs) and non-golf utility vehicles, urban mobility vehicles (UMV) would appear to be a natural progression. In addition, UTV manufacturers have some of the capabilities needed to compete in this space.
New Urban Mobility Vehicles
Currently, startups are aggressively pursuing the UMV opportunity. Uniti from Sweden, BARO from the UK and Arcimoto from the US are some of the companies at the forefront on new vehicles and concepts for urban mobility. However, established auto manufacturer Daimler Benz is one exception to the startups with their Smart for Two small vehicle. The electric version of the vehicle is a foundational platform upon which the company plans to build. The question is where are the STOV manufacturers. In short, they appear to be well positioned for the opportunity but will they pursue it?
In a recent interview with CNBC Polaris CEO Scott Wine commented on the affects of the tariffs on the company. He stated that the increase to 25% would be “catastrophic”. The company previously estimated that they would cost the company $40 million in the last fiscal year. At the 10% tariff level they were guiding towards an approximately $90 million hit for the current fiscal year. However, at the 25% level that would jump to $195 to $200 million. In addition to these China specific tariffs, other aluminum and steel tariffs hurt the company as well.
Polaris More Exposed
Polaris is in a particularly tough spot with the tariffs because of their supply chain relative to the other major UTV manufacturers. The major Japanese OEMs, Yamaha, Honda and Kawasaki, mainly source their imported parts from Japan and thus avoid the onerous China tariffs. Can-Am produces products in Canada and Mexico and therefore, are less exposed to the tariff regime as well. Polaris on the other hand sources more of their components from China.
Farmer Segment Exposure
UTV manufacturers exposed to the farm segment are likely to suffer as well. Farmers report lower commodity prices and higher equipment prices. The tariffs are increasing farm equipment prices in the range of 20% according to some farmers. Although this refers to large pieces of farming equipment, if farmers are not spending on these large pieces and trying to cut costs in general, they are likely forgoing UTV purchases as well. John Deere and Kubota are likely the most effected brands as this is a strong segment for them. However, Can-Am could possibly be feeling an impact in their Defender line and Polaris in their Ranger line.
Some Value Brands Vulnerable
In the past few years value brands have made inroads at the lower end of the price scale. Many of these companies are sourcing parts or vehicles from China. For example, CFMOTO is based in China. In addition, Cub Cadet UTVs are manufactured by Hisun in China. Given their value pricing approach, the tariffs are likely putting some pressure on these companies. If they have to raise their prices too much, they lose their value proposition in relation to the major brands in the market.
Recent vehicle news from Asia spurred some thoughts on the opportunity urban mobility presents to small, task-oriented vehicle (STOV) manufacturers.
Urban Mobility Changing
Battery Swapping Autorickshaws
The first article reports on the use of battery swapping to power electric autorickshaws in India. Battery swapping removes the very expensive battery component from the upfront purchase price and reduces long term operating costs. In addition, the electric part moves toward a more climate friendly and less polluting transportation system.
The current thinking by some is that smaller two and three-wheeled vehicles provide the best economic case for battery swapping. In contrast, larger vehicles require larger batteries. This means more expensive and complicated swapping stations, and higher up front investment costs for the battery supplier. While this an India based example, the advent of e-scooters, e-bikes and startups offering three wheelers indicate market potential in the US.
Fuel Cell Powered Small Vehicle
This week Yamaha Motor announced the public testing of a prototype fuel cell vehicle for a vehicle sharing service. The vehicle looks like less than a typical automobile but more than a golf car. The technology advances new concepts in urban mobility as well as initiatives in Japan to promote hydrogen based fueling. Though the fuel cell provides greater range and less refueling needs, the more important part of this test for STOV OEMs is the vehicle form. The vehicle size and level of complexity should be a good fit for their capabilities.
Is Urban Mobility Too Small for Traditional Auto OEMs?
These transportation technologies represent a new opportunity for STOV manufacturers to leverage their existing manufacturing and technology expertise into new vehicle markets. The traditional automobile manufacturers are less likely to view these markets as an opportunity. Although, in the long term they could represent a threat to their dominance or at least reduce their addressable market. They are already pouring billions of dollars to enter the highway capable EV market. However, they must balance investment between highly profitable and traditionally popular ICE vehicles and lower margin and riskier EVs. Smaller, alternative energy vehicles are even farther down the list. In addition, their work force arguably did not join their companies to produce small, urban vehicles.
Urban Mobility Attracts Diverse Providers
Entrants in the urban mobility space include startups like Arcimoto and traditional small vehicle manufacturers serving Asian and to a lesser degree European markets. Startups have the advantage of creating purpose-built vehicles specifically for new mobility markets. However, they lack the manufacturing expertise, financial resources and distribution networks. Traditional foreign small vehicle manufacturers know their home markets, and have the distribution, financing and manufacturing assets. However, they do not have a strong presence in the US market.
Other potential entrants include the likes of bike sharing companies as well as Lyft and Uber that have moved into ride sharing with e-scooters and e-bikes. However, these company’s expertise is not in manufacturing. They provide the platform for people to access mobility. One can argue that the platform itself does not provide as a wide moat as the manufacturing and technology assets. The strengths and weaknesses of these potential providers and the dynamics of the urban mobility market suggest an opening for existing US STOV manufacturers.
Best Positioned US STOV Market Leaders
Among the current leading UTV, golf car and LSV manufacturers companies Polaris, Textron and Yamaha appear to be best positioned to pursue this new opportunity. Polaris owns Aixam, the leading European quadricycle brand as well as the GEM, Goupil and Taylor-Dunn electric vehicle brands. These brands provide them with electric vehicle technology as well as a range of distribution networks. On the other hand, the DNA and profit driver of Polaris is off-road motorsports. They may see relatively greater returns on investment in their traditional markets.
After the acquisition of Arctic Cat, Textron is similar to Polaris and now has an expansive small vehicle portfolio. Their DNA is more golf car and PTV, and therefore likely better suited towards urban mobility. However, the integration of Arctic Cat has been bumpy and they were slow to recognize the original UTV opportunity. As a piece of a larger conglomerate, their Textron Specialized Vehicle division may not be entrepreneurial enough or have the freedom to pursue this opportunity.
Yamaha has both off-road and golf car type offerings as well as e-bikes, but are not well coordinated. These businesses are in separate business units. In addition, their golf car portfolio has been emphasizing gas powered technology rather than electric technology. Yamaha’s existing mobility concept testing along with having one foot in the Asian market and another in the US should be an advantage. However, their slow re-entry into the UTV market after problems with the Rhino side-by-side speaks to a more cautious corporate approach.
The STOV OEMs appear to have many of the necessary requirements to pursue the urban mobility opportunity. The question remains whether they believe in the opportunity and if they are willing to take the risk.
Can-Am earnings were strong for the fourth quarter and fiscal year for 2019. Annual revenues increased 18% from $4.5 billion to $5.2 billion (CA$) and quarterly revenues jumped 23% to $1.5 billion. The following are highlights from the recent earnings call.
North American powersports retail sales excluding snowmobile sales grew 19% while the industry decreased low single digits in the fourth quarter
North American side-by-side sales increased high teens while the industry increased single digits
Can-Am grew market share in side-by-sides
Increased UTV production capacity by 30% at Mexico facilities with another 50% capacity increase planned for the coming year
Continued to introduce a new side-by-side model every six months following their long term plan
Side-by-side market remains competitive with promotions or “back end” money going to dealers to reduce net pricing
Can-Am Earnings Guidance for FY2020
Management is expecting continued growth for fiscal year 2020
Annual revenue is expected to increase 7-11%.
Year-Around Products revenue is expected to grow between 12% and 17% driven primarily by side-by-side models.
Can-Am has grown into the main rival to Polaris in the North American side-by-side market. They have continued to gain market share for several years and have separated themselves from the rest of the pack chasing Polaris. They are the only company that has been able to match the market leader’s level of new model introductions. The development of their Defender product lines to pursue the utility vehicle segment has been a key to unlocking more growth. The complete Can-Am side-by-side lineup now comes close in size and segment coverage to the Polaris armada. Can-Am appears to be running on all cylinders and I would expect them to continue increasing revenue and market share.
Textron Off Road recently recalled approximately 700 model year 2018 Stampede and Rustler utility vehicles. The lower front suspension arm can fail and potentially cause a crash. The recall involves two-seat and four-seat models including the Stampede, Stampede 4, Rustler 850 and Rustler Crew 850. The following recall information is from the Consumer Products Safety Commission.
Stampede & Rustler Recall Information
Name of product: Stampede and Rustler off-highway utility vehicles (ROV’s)
Hazard: The lower front suspension arm can fail, posing a crash hazard.
Recall date: March 5, 2019
Units: About 700 (In addition, about 70 were sold in Canada.)
Consumer Contact: Arctic Cat at 800-279-6851 from 8 a.m. to 5 p.m. CT Monday through Friday or online at www.textronoffroad.com and click on Recall Information located at the bottom of the page for more information.
Description: This recall involves all model year 2018 Stampede and Rustler model side by side Arctic Cat off-highway vehicles with VIN number 9003240 through 9004062. The recalled vehicles were sold in multiple colors, have four wheels and side-by-side seating for two or four people. The Stampede models have Textron Off Road on each side of the hood area and Stampede on each side of the box. The Rustler models have Rustler 850 on each side of the hood area and 4X4 on each side of the box. The Vin number is located under the front hood on all models.
Remedy: Consumers should immediately stop using the recalled ROVs and contact TSV/Arctic Cat to schedule a free repair. Arctic Cat is contacting all known purchasers directly. If you need assistance locating an authorized dealer to conduct this repair, contact Arctic Cat.
Incidents/Injuries: The firm has received four reports of front suspension arm failures. No injuries or crashes have been reported.
Sold At: Textron Off Road and Arctic Cat dealers nationwide from September 2017 through December 2018 for between $13,800 and $16,000.
Manufacturer(s): Arctic Cat Inc., of Thief River Falls, Minn., a subsidiary of Textron Specialized Vehicles, of Augusta, Ga
Manufactured In: United States
Recall number: 19-727
This is a small recall, but follows on the heels of another recent Textron Off Road recall. Textron produces the Rustler UTV for farm equipment manufacturer New Holland. The two companies partnered several years ago to produce utility vehicles. The partnership marries Textron’s vehicle manufacturing expertise with New Hollands farm oriented distribution network. SVR maintains an ongoing list of recent STOV recalls.
Textron Off Road recently announced the recall of approximately 200 model year 2019 Havoc utility vehicles. Fuel can leak from the fuel line and pose a fire hazard. The two-seat UTVs were sold from October 2018 through January 2019. Consumers should stop using the vehicles and contact an Arctic Cat dealer to schedule a free repair. The following recall information is from the Consumer Products Safety Commission.
Havoc Recall Information
Name of product: Havoc off-highway utility vehicles (ROVs)
Hazard: Fuel can leak from the fuel line, posing a fire hazard.
Recall date: March 5, 2019
Units: About 200
Consumer Contact: Arctic Cat at 800-279-6851 from 8 a.m. to 5 p.m. CT Monday through Friday or online and click on Recall Information located at the bottom of the page for more information.
Description: This recall involves Model Year 2019 Textron Havoc off-highway utility vehicles manufactured by Arctic Cat. The two-seat vehicles come in three color combinations: Charcoal metallic/black, red/black or white/black. The vehicles have Textron Off Road printed on each side of the hood and Havoc on each side of the rear cargo box. Vehicle identification numbers (VIN) ending in 9007497 through 9007717 are included in this recall. The VIN is stamped under the vehicle’s front hood.
Remedy: Consumers should immediately stop using the recalled vehicles and contact Arctic Cat to schedule a free repair. Arctic Cat is contacting all known purchasers directly.
Incidents/Injuries: None reported
Sold at: Textron Off Road and Arctic Cat dealers nationwide from October 2018 through January 2019 for between $14,000 and $18,000.
Manufacturer(s): Arctic Cat Inc., of Thief River Falls, Minn., a subsidiary of Textron Specialized Vehicles, of Augusta, Ga.
Manufactured In: United StatesRecall number:19-726
This is a minor recall, but does again involve an issue with the fuel lines or fuel system. There have been at least six recalls from across the industry since early 2015 that involve fuel system problems. SVR maintains an ongoing list of recent STOV recalls.
In December, Kawasaki announced the recall of approximately 1,000 Mule Pro utility vehicles. The vehicle’s ROPS can fail to protect occupants. The recall involves model year 2018 and 2019 Mule Pro DXT, DX, FXT, FX and FXR vehicles sold from August to September of 2018. The following are recall details from the Consumer Products Safety Commission.
Hazard: The vehicle’s rollover protection structure (ROPS) can fail to protect consumers, posing an injury hazard.
Recall date: December 6, 2018
Units: About 1,000
Recall Date: December 6, 2018
Units: About 1,000
Consumer Contact: Kawasaki toll-free at 866-802-9381 from 8 a.m. to 5 p.m. PT Monday through Friday or online at www.Kawasaki.com and click on “Recalls” for more information.
Description: This recall involves 2018 and 2019 Mule Pro utility vehicles. The four-wheel, off-highway utility vehicles were sold in black, green, white, red, bronze, silver, camo and blue. They have side by side seating for three to six people and automotive style controls. Mule Pro is printed on the right and left front fender. Kawasaki is printed on the cargo box. The Vehicle Identification Number (VIN) is located on the steel frame between the right front lower A-arm mounts.
Mule Pro-DXT (EPS)
JKAAFCA1XJB501117 through JKAAFCA11JB501152
Mule Pro-DXT (EPS)
JKAAFCB18JB503625 through JKAAFCB18JB503642
Mule Pro-DX (EPS)
JKAAFCE1XJB502410 through JKAAFCE18JB502437
JKBAFSA13KB501645 through JKBAFSA14KB501671
JKBAFSB15KB513858 through JKBAFSB18KB514230
JKBAFSC19KB513036 through JKBAFSC19KB513361
JKBAFSD18KB506741 through JKBAFSD1XKB506787
Mule Pro-FX (EPS/LE)
JKBAFSF13KB506336 through JKBAFSF10KB506603
Mule Pro-FX (EPS/LE)
JKBAFSG18KB504354 through JKBAFSG1XKB504355
JKBAFSJ19KB508972 through JKBAFSJ15KB509343
JKBAFSK14KB504620 through JKBAFSK17KB504630
Remedy: Consumers should immediately stop using the recalled utility vehicles and contact a Kawasaki dealer to schedule a free repair. Kawasaki is contacting all known purchasers directly.
Incidents/Injuries: None reported
Sold At: Kawasaki dealers nationwide from August 2018 through September 2018 for between $13,000 and $17,000.
Importer(s): Kawasaki Motors Corp., U.S.A. of Foothill Ranch, Calif.
Distributor(s): Kawasaki Motors Corp., U.S.A. of Foothill Ranch, Calif.
My colleague Steve Metzger recently attended the 2019 PGA Show. He reports on the trends in personal mobility vehicles from established and new players. In addition, he discusses the mainstreaming of lithium batteries and related implications. The following is a summary of key insights from the article.
The personal mobility market in the form of personal transportation vehicles (PTVs) is attracting an increased level of product development.
The major fleet golf car manufacturers, Club Car, E-Z-GO and Yamaha are turning their attention to PTVs and other non-golf markets.
New models incorporate a greater variety of features and more automotive style features
The Sirius PTV from Star Electric Vehicles is the most likely candidate to seriously challenge offerings from Club Car, E-Z-GO and Yamaha.
Club Car introduced lithium battery powered models and other manufacturers are considering the technology as well
Both Trojan Battery and ReLion Battery presented lithium batteries targeting the aftermarket for PTVs, golf cars and light-duty utility vehicles
Lithium battery market penetration has implications for the recycling of fleet golf cars, used PTVs and future demand for public road access for PTVs
EFI engine technology continues to advance in the face of improving battery technology as market choice will likely increase before a winner shakes out
Potential California LSV legislation could become a model for other states and a market driver
Product engineers may drive the market in the next 3 to 5 years
A recent article speculated that Ingersoll-Rand’s acquisition of Precision Flow Systems could pave the way breaking up the conglomerate. Club Car is one of the pieces that seems a poor fit with the rest of Ingersoll-Rand. If this is the case, then Polaris Industries might be a good suitor.
The Pros for Acquiring Club Car
A strong international brand
Club Car has a number of characteristics that match previous Polaris acquisitions. First, Club Car is a leading brand, if not, the leading brand of the three major golf car manufacturers. Second, it is an international brand. Third, Club Car participates, in part, in a fragmented industry. Therefore, Polaris would have an opportunity to use their resources to establish a more dominate market position. While the golf car fleet market is primarily a three company affair, Club Car, E-Z-GO and Yamaha, the non-fleet personal transportation vehicle (PTV) and light utility vehicle markets are more fragmented markets. Fourth, a large installed base of vehicles forms the basis for a substantial parts and accessories business. This was a key reason for the Polaris purchase of Taylor-Dunn.
Club Car complements Polaris vehicle portfolio
A large portion of Club Car vehicles sold are electric and would fit well with the Polaris EV portfolio. Other EVs in the Polaris portfolio include GEM, Goupil, Taylor-Dunn and Aixam. Polaris could spread their battery and EV powertrain development costs over a larger number of vehicles. In addition, Club Car’s end markets and distribution network would complement current efforts by Polaris. Their PTVs would complement the street legal GEM vehicles and their light utility vehicles would complement the more heavy-duty Rangers.
In addition, the golf manufacturer’s dealer network would expand Polaris’ footprint. While there is some overlap with the GEM and Taylor-Dunn dealer networks, there would also be a large number of additional dealer locations in the US and internationally. Furthermore, these dealers could be used to expand the GEM and Taylor-Dunn distribution. Club Car end markets such as golf courses, resorts, colleges, airports and other institutions would also take Polaris into new markets or broaden their vehicle offerings where they overlap.
The Cons for Acquiring Club Car
Is there enough growth?
Polaris looks for acquisitions in growing markets and/or traditionally strong but neglected brands that they can leverage. In the case of Club Car, the fleet golf car market has been declining for a number of years. The PTV and light UTV markets are growing but not at really high rates and are a smaller part of the business. Club Car isn’t necessarily a neglected brand but is somewhat lost among much larger Ingersoll-Rand businesses. In contrast, Polaris might be able to focus more attention and resources and make a strong brand even stronger.
Another acquisition to swallow
Polaris has already made a number of acquisitions in the past year, adding Boat Holdings and the Marquis-Larson Boat Group to start a new boating business. Acquiring Club Car would require more management time and focus to successfully integrate the business into Polaris. In addition, the purchase would likely add additional debt to their balance sheet. Polaris management might want to finish integrating their recent acquisitions before adding another piece and avoid increasing their debt.
What Will Polaris Do?
A strong argument could be made that Polaris should acquire Club Car if it’s for sale. The key questions are whether the management perceives if there is enough growth in the market, and do they think they can use their resources to drive more growth. The combination of the PTV and light UTV markets along with the parts and accessories business may offer enough potential. Timing may also be an issue. Any down turn in the economy, which some are predicting, would hurt Polaris. Discretionary income drives a significant portion of their sales.
Polaris reported another strong quarter and full year with 4th quarter sales of $1.6 billion, up 14% from last year. Full year sales topped $6.1 billion, up 12% from the prior year. The ORV/Snowmobile segment reported sales of $1.1 billion for the quarter, an increase of 7% year over year. The ORV portion declined 2% as the company had a tough comparable with the prior year’s quarter. On a negative note, management expects tariff and trade war costs to total between $110 to $120 million company wide for fiscal year 2019. They will hit the ORV and Motorcycle businesses the hardest. A significant portion of the Q&A on the call revolved around tariff and trade war costs. A summary of the earnings call highlights related to the STOV market follow.
Polaris Earnings Call Highlights
Polaris side-by-side retail sales increased mid single digits % while ATV retail sales decreased mid single digits %
Average selling price for the ORV segment increased by 7% but were partially offset by tariff, logistics, and commodity costs
Polaris gained market share in the side-by-side market for the quarter and the full year
Management believes they are gaining share from Japanese competitors and Arctic Cat, now owned by Textron
Global Adjacent Markets revenue increased 4% to $122 million on the strength of commercial, government and defense and Aixam businesses.
Polaris increased wholegood prices 3.5% for the ORV/Snowmobile segment at the start of 2019 to counter tariff and trade costs
Revenue for ORV/Snowmobile and Global Adjacent Markets segments are expected to increase mid-single digits % for fiscal year 2019
Management does not expect to enter into electric powered markets until there is large consumer demand. Their response pertained to motorcycles but appears to be their general philosophy.