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OMC Bankruptcy Sets Consumers Adrift

Like an outboard engine heaving its last gasp, the marine industry legend Outboard Marine Corp. (OMC) filed for bankruptcy in late December, leaving an oil slick of debt and a boatload of consumers choking on the fumes. Although the Waukegan, IL, conglomerate had been losing power financially since 1997, few in the boating community were prepared for just how abrupt and complete OMC’s breakdown would be.

Shortly after filing for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Chicago on December 22, OMC announced that it would no longer warranty any of its products. This left tens of thousands of consumers without protection if their boats or engines failed and thousands of OMC dealers with large inventories no longer backed by their manufacturers.

According to Katherine Gleason, the federal trustee assigned to the case, OMC intends to liquidate its assets completely by selling off its boat and engine divisions. The resulting funds will be used to first pay off secured debts, like mortgages and liens, then debts held by unsecured creditors, including those of consumers.

In response to questions about the warranty status of new OMC products, Gleason said that she’s never seen funds set aside in other bankruptcy cases for possible warranty claims in the future. She pointed out that consumers with outstanding warranty claims today would be able to file proof of claim forms with the court. These claims will be paid — but probably not in full — when OMC’s assets are released.

Companies that buy assets sold in bankruptcy auctions are not legally obligated to assume warranty liability for products made by the predecessor company, according to Larry Katz, a Washington, D.C., bankruptcy lawyer. Establishing warranty coverage can add millions of dollars to the cost of acquiring a failing firm.

Some companies may do so, however, to maintain customer goodwill, Gleason explained. She said it’s possible this could happen in the OMC case.

At its height, OMC claimed a third of the boat and engine market in the U.S., selling as many as 100,000 engines in 2000. The company was an outgrowth of early Evinrude and Johnson outboard engine production that began nearly 100 years ago. In later years, OMC acquired a dozen boat manufacturing companies, including Chris Craft, Four Winns, Hydra-Sports, Seaswirl, Stratos, Javelin and Lowe.

OMC’s Ficht fuel injected engines were introduced in 1997 in response to EPA requirements for cleaner-burning, fuel-efficient marine power. Ficht engines, however, were plagued with problems that OMC has admitted helped put them in the red due to numerous costly “upgrades” and engine redesign. The resulting customer ill will led to decreased sales even though later models were redesigned and improved.

Industry insiders predict that OMC’s boat companies will sell quickly and easily but that the Johnson and Evinrude operations will have less appeal, largely because of the problems with Ficht technology.

At least one member of the marine industry blamed OMC’s bankruptcy in part on the rigor of meeting federal Clean Air Act emission reduction requirements. George Buckley, chairman and CEO of Brunswick Corp., says the EPA rushed engine makers to meet requirements that couldn’t be met in the time frame given.

"U.S.-owned marine engine companies faced not only the emission issues and competitive threats from Japanese manufacturers, but also a consolidating dealer body, huge price increases on sterndrive engine blocks and the emergence of the Internet," Buckley said.

In addition, OMC now faults its decision to outsource parts to independent contractors who were unable to make timely deliveries.

Customers Adrift

BoatUS has heard from plenty of boating consumers who are angry.

Gary Lee of Fort Myers, FL, is a good example. He describes as “nightmarish” his experience with the twin 150 hp Ficht outboards he purchased in 1998. Like many other Ficht engines, Lee’s haven’t run right since he took delivery. Neither his dealer, another OMC mechanic nor OMC factory technicians could find the remedy.

Lee wanted OMC to participate in BetterBOAT, a dispute resolution program established by BoatUS and the marine industry to resolve consumer disputes. Lee hoped that through BetterBOAT he could get the company to replace the engines. Late last year, OMC asked that the BetterBOAT panel allow them more time to get the engines running.

In December, Lee was finally promised complete repairs. The technician who inspected the engines was confident he could make the right fix. At the same time, OMC’s corporate attorney told BoatUS that OMC would provide replacement powerheads.

Two days later, however, OMC filed for bankruptcy. The technicians who worked with Lee over the years lost their jobs along with thousands of other OMC employees and the attorney hasn’t responded to phone calls or e-mails from BoatUS

OMC repair shops are also feeling the pinch, but are able to operate. Jeff Luten, owner of Jeff’s Outboards in Jacksonville, FL, said that although he can get parts from OMC’s warehouse, he must pay in advance by certified check. “We can’t get parts as fast as we normally did,” Luten said, “but they’re coming in.”

OMC dealers tell a grimmer tale. Just weeks before OMC filed for bankruptcy, dealers were encouraged to place large orders for 2001 inventory. They were promised significant rebates that will apparently no longer be honored.

Help? Help!

Help of a sort may be available through a service contract program set up by Genmar Corp., the owner of Wellcraft, Larson, Hatteras and Trojan, among others.

“We were concerned that there would be a meltdown in the industry” if OMC customers were suddenly left without warranties,” George Sullivan, vice president of Genmar, told BoatUS He said Genmar has no interest in buying a piece of OMC, but added the bankruptcy “created a very unstable situation and we wanted to shore up public confidence.”

First Protection Corp. of Wayzata, MN, underwrites the Genmar plan, which is similar to extended service contracts purchased by retail customers. It is being offered to any dealers who handle OMC engines, regardless of what make boat the engine is mounted on.

For now, Genmar’s program is available only for new Evinrude and Johnson outboards sold to retail customers since October 1, 2000, according to James Beltz, First Protection president. The company may eventually expand coverage for older engines, he said. Boat owners should check with their local OMC dealers to find out whether they are participating.

The plan lasts for one or two years, depending on what OMC’s original warranty would have covered. Engine owners have the option of buying a four-year extension, Beltz told BoatUS With the plan, dealers have the security of knowing they will be paid for their labor.

First Protection is confident that there are enough OMC parts available to allow dealers to make repairs. In fact, Sierra International, a manufacturer of marine engine and drive parts, has set up an OMC Dealers Support Program to ensure “an uninterrupted flow of parts to OMC dealers left stranded,” according to John Bender of Sierra. Mercury Marine has also offered to help dealers with repair parts.

The Genmar contracts cost 7% to 8% of the dealer price per engine. Most dealers predict they will have to sell their OMC products at rock bottom prices, since there’s no backup from the manufacturer. Dealers burdened with large inventories may be unwilling to take on the additional cost of a service contract so it’s likely this cost will be passed along to the retail customer.

In contrast to Genmar’s plan for OMC dealers, the usual extended service contracts sold to retail customers are an expensive option that probably don’t offer much protection in a case like this. Normally costing 10% to 15% of the product’s value, service contracts don’t cover manufacturer’s defects and exclude many of the conditions a warranty would automatically cover.

Likewise, marine insurance policies do not cover manufacturer’s defects, although damages resulting from a defect may be covered.

What’s Next?

The intent of bankruptcy law is to maintain stability in the marketplace when a business or individual is unable to pay its creditors. The law provides that secured creditors in a bankruptcy case get paid first to avoid a ripple effect of failures throughout the economy. Unsecured creditors share in the remaining assets, often receiving only a few cents on the dollar when claims are finally paid. Unsecured claims are paid according to a priority assigned by law, with those filed by consumer creditors at the bottom of the priority list.

So, when a large bankrupt corporation like OMC can announce that it wishes to expedite the sale of its assets “to retain their value and stature in the marketplace,” but does not arrange for warranty continuity, consumers are given a clear message that they are on the outside, looking into a world of high finance that doesn’t recognize their importance in terms of repeat business or brand loyalty.

This is particularly disconcerting to BoatUS Founder Richard Schwartz, who said, “The bankruptcy auction may satisfy OMC’s creditors, but it does little or nothing for owners of OMC products. These are the people who gave OMC its lifeblood and profits year after year.

“A fund should be created by the bankruptcy court,” said Schwartz, “to protect the consumers who purchased OMC products in good faith.”

(c) Copyright BoatUS Magazine, March 2001

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